Just when you thought momentum stock mania was from last year’s news, come along clock ring (NASDAQ: HOUR), which had a rocket ride on the first day of trading. On January 6, Hour Loop priced its initial public offering (IPO) at $4 (raising $6 million in total proceeds in the process), only to witness the stock price nearly double to $7.99 on January 7, the day of the IPO.
Suddenly, a company that most traders had probably never heard of was trending. Meanwhile, the stock’s upward trajectory continued over the following days as investors pushed it back to $9 and threatened $10 and beyond.
Now is the time to take a step back and evaluate Hour Loop as a company. As you’ll see, Hour Loop’s business is almost entirely dependent on other businesses, but it’s resting on the back of an e-commerce giant – and it seems to be doing so successfully so far.
If you can’t beat them, join them
The Hour Loop business model answers the question: Why are you trying to compete with the e-commerce giant Amazon (NASDAQ: AMZN) When can you take advantage of the already existing ecosystem instead?
If you’ve been shopping on Amazon (and who doesn’t nowadays?), there’s a reasonable chance that you indirectly dealt with Hour Loop without knowing it. Although the company has sold merchandise on its own website since 2013 and has expanded its operations to Walmart Website In October 2020, Hour Loop generated (by its own admission) nearly all of its revenue as a third-party seller on the Amazon platform.
Perhaps this helps explain why Wall Street stocks appear so explosively on the Hour Loop. There are plenty of publicly traded e-commerce companies to choose from, but Hour Loop offers investors a different angle: exposure to a massive distributor on Amazon.
How “mega”? Suffice it to say, Hour Loop manages over 100,000 SKUs. Like Amazon itself, Hour Loop offers a variety of product categories ranging from home and garden décor to toys, kitchenware, apparel, and electronics.
Software is the edge
The core strategy of the Hour Loop is to offer customers the choices of vendors’ products. In addition to the large offering and wide variety of product offerings, Hour Loop also has a technology-focused competitive advantage among third-party Amazon sellers.
This feature consists of Hour Loop’s proprietary software system, which collects and processes large amounts of data daily to improve company operations and sales. More specifically, this program identifies product gaps so that the Hour Loop can keep their products in stock year-round—especially during the crucial holiday season.
Furthermore, Hour Loop publishes a proprietary automated pricing/re-pricing tool that analyzes sales trends, inventory costs, potential profits, competitive offerings, seasonality, and other metrics. With that, the tool can determine the “urgency level” of a product and then automatically adjust the price of the product accordingly.
The price of dependency
Going forward, Hour Loop plans to expand its business by “rapidly” increasing the number of business managers, suppliers and SKUs. That’s big talk about new business for an IPO: Is the company offering the financial growth needed to support it?
On the financial front, at least, the ring of the clock appears to be on the right track. In the six months ended June 30, 2021, the company generated $21 million in revenue, nearly double $10.8 million from the prior year’s equivalent time frame. Turning to the bottom line, Hour Loop’s net income of $2 million from the six months ended June 30, 2021 is a significant improvement over the $638,000 posted during the equivalent six-month period the previous year.
Hour Loop’s biggest challenge is its heavy dependence on Amazon, which company can, on a whim, make business operations easier or more difficult for Hour Loop. In particular, Hour Loop acknowledges the risks that increases in Amazon fees may affect Hour Loop profit margins. Going forward, investors can keep an eye on Amazon’s fee burdens on sellers/sellers, and another eye on the Hour Loop’s operating expense track, particularly in the “selling and marketing” category.
stay in the loop
While the selection of products for Hour Loop sellers is broad, the company’s business model is very narrow. Plain and simple, Hour Loop uses proprietary technology tools to facilitate third-party selling on Amazon. But there’s plenty of room in Amazon’s massive e-commerce ecosystem for players like Hour Loop to thrive; The company’s higher and recent growth is proof of this.
Growth investors should not always be shy when the stock price doubles immediately. I think given the current financial picture, investors can stick to this stock in good conscience. Simply keep your finger on the eject button, as Amazon can make the life of the Hour Loop – and therefore the lives of the company’s stakeholders – more difficult at any moment.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.