» Will Gmarket (Nasdaq: GMKT) be the next Nasdaq short squeeze?

Will Gmarket (Nasdaq: GMKT) be the next Nasdaq short squeeze?

April 27, 2007 on 11:31 am | In Short Term Picks |

BUY GMKT near $16.90, set stop loss at $15.00

Gmarket operates a retail e-commerce marketplace in South Korea. Often referred to as the Korean Ebay, Gmarket would be better described as a mix between Ebay and Amazon. Gmarket sells products in both auction and fixed priced formats and the selling format caters to small to mid-sized businesses. Transaction fees account for about 60% of Gmarket’s revenue, while advertising and other non-transaction revenues account for the remaining 40%.

Gmarket has a market cap of about $820 million, a P/E of 42, and a forward P/E of 19. Gmarket has a strong balance sheet with $187 million in cash and zero long term debt.

The recent move in Amazon shares is mind boggling and it has changed the investing environment for at least the short term. Although the Amazon surge was helped by short covering, it appears that investors are once again willing to pay premium prices for companies with rapid growth. Yesterday, Bidu joined in on the fun and gained over 20% in after hours trading after the company raised guidance and reported slightly higher than expected earnings.

At Wall Street Mayhem we believe that Gmarket’s valuation compares favorably to other internet companies with similar growth potential. Despite Bidu’s blowout quarter, revenue for the first quarter came in at just $35.7 million. Analysts expect Gmarket to have first quarter revenues of $53.43 million. Bidu’s market cap weighs in at a hefty $4.5 billion, while Gmarket’s market cap seems reasonable at about $820 million.

Bidu bulls will argue that Bidu enjoys higher margins than Gmarket and Bidu has greater growth potential due to the rapid growth of the Chinese economy. Although this argument has merit, Gmarket has the potential to expand into the Chinese and Japanese markets which could rapidly accelerate revenue and earnings growth. Gmarket has previously stated plans for international expansion and fellow Wall Street Mayhem pick Ebay has struggled to grow in Asian markets leaving the door wide open for Gmarket to step in and gain market share.

The huge gains enjoyed by Amazon and Bidu were fueled in part by short covering. We think this short squeeze trend is likely to continue for the near term making companies with high short interest and high growth potential attractive. Amazon had short interest that totaled 15% of the float before earnings, while Bidu’s short interest represented about 10% of the float. Gmarket shares have short interest totaling about 16% of the float.

Gmarket reported fourth quarter earnings on March 8^th and although net income rose 78% to $6.8 million and revenue jumped 67% to $51.6 million, Gmarket shares dropped 20% because these numbers missed analyst expectations.

First quarter earning are scheduled to be released on May 9^th and we think this is a great time to go long Gmarket before the earnings release. Considering the reasonable P/E, strong balance sheet, high short interest, and recent big moves by Amazon and Bidu, we think Gmarket shares are poised to surge after first quarter earnings.

Analysts expect Gmarket to report first quarter revenues of $53.43 million and earnings per share of 0.13. Wall Street Mayhem thinks that Gmarket will beat these numbers. On April 9^th Gmarket reported that gross merchandise value for the first quarter came in at $771.59 million representing a 54% year over year increase and a 6% sequential increase. Therefore, if Gmarket’s revenues can match the 6% sequential gain seen in gross merchandise value revenues will come in at $54.69 million. Although the revenue as a percentage of gross merchandise value will have to increase from .0699 to .0708 in order to increase revenues to $54.69 million, we think this increase in revenues as a percentage of gross merchandise value is likely due to the recent increases in non-transaction related revenue. With growth in the subscriber base and growth in monthly page views, Gmarket’s non-transaction related revenue should help the company beat first quarter expectations.

Over 68% of the South Korean population uses the Internet and broadband penetration is over 25%. The South Korean economy is the 11^th largest in the world and Gmarket holds a dominant position in e-commerce transactions in South Korea. Even without Asian expansion, Gmarket should continue to rapidly grow profits and revenues. However, with the help of 10% beneficial owner Yahoo, Gmarket could easily become a large player in e-commerce throughout Asia. After Yahoo made an investment in Gmarket in June of 2006, Yahoo stated, “we look forward to working with Gmarket to leverage their e-commerce expertise to further expand Yahoo’s leading position in e-commerce in Asia.” Gmarket stated that the Yahoo investment enhanced Gmarket’s strategy to improve growth opportunities abroad and that Gmarket has agreed with Yahoo to implement various strategic initiatives internationally.

Gmarket shares represent a compelling value at current prices and Wall Street Mayhem believes that even a small bump in second quarter guidance could result in a large gain in Gmarket’s stock. Gmarket’s stock could also jump with an official announcement of the expansion to an additional Asian market. Either of these events, combined with a short covering panic, could double the value of Gmarket.

Full Disclosure: Wall Street Mayhem is long GMKT

36 Comments »

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This company has great potential, and the timing now appears excellent. Nice reasoned article, btw. I have been accumulating GMKT and selling OTM calls to lower my avg. price, but I’m now thinking about buying back my May calls to get full upside exposure. I suppose a very risk averse investor might buy the stock, sell the $20 calls and use the proceeds to buy $15 puts. I see limited downside, so I’m not going to spend money on the safety net.

Comment by Prince Andrei Bolkonsky — April 27, 2007 #
Gmarket seems really cheap here even without the potential for a short squeeze. I can’t believe how expensive Bidu is compared to GMKT.

Comment by GreenInvestor — April 27, 2007 #
I’m in, GMKT has the potential to take off. That 16% short interest is going to turn into the longs best friend in no time. GMKT to 30.

Comment by Cancan — April 27, 2007 #
GMKT has as much or more potential for a near term move than BIDU or AMZN. My favorite thing about GMKT is the tiny float (6.1 million) and large short interest (1 million). The combination of the small float and short interest should give this stock some rocket fuel with any positive news.

Comment by Opal — April 28, 2007 #
I think the event that will give GMKT shares a jump start will be Yahoo buying more shares or possibly even buying the entire company. GMKT is a serious bargian for Yahoo at these prices.

Comment by TraderJoe — April 28, 2007 #
I still think Bidu will outperform GMKT over the next year, but I think both will go up substaintially from current prices. I’m in GMKT, but I have a bigger position in Bidu.

Comment by Jorge — April 28, 2007 #
Goldman Sachs thinks GMKT is undervalued: http://internet.seekingalpha.com/article/29272

I’ve been buying GMKT ever since the drop after last quarters earnings. Nice to hear that Wall Street Mayhem and Goldman Sachs agree with my analysis on GMKT. I see $30 a share before the end of the year.

Comment by Mary — April 28, 2007 #
Up $2 since the recommendation. Nice one. I ended up selling 17.50 calls on my position and using the proceeds to buy 4 times as many 20 calls, which has more than doubled my profit (were I to take it now). I’d love to see blowout earnings.

Comment by Prince Andrei Bolkonsky — May 4, 2007 #
Agreed, excellent recommdation and timing. I bought the stock, but I wish I had gone for those 20 calls as well. Oh well, I’m not complaining, this stock could easily hit $25 after earnings considering today’s move with no news.

Comment by Mary — May 4, 2007 #
[…] Cree has the added bonus of a relatively high percentage of shares held short. Considering the recent strength in the overall market, these short shares could help propel CREE higher with any positive news. Last months Wall Street Mayhem pick Gmarket surged 18% after earnings despite missing estimates on the top line. We believe this move was largely due to short covering. If the trend started by Color Kinetics this week continues, both Cree and Color Kinetics could benefit from short covering as news about LED lighting continues to grab the attention of the investing public. […]

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