Ozon - There and Back Again

The global e-commerce sector has undergone a substantial correction recently - as has Ozon, which is back again at IPO levels. The company continues to post robust GMV growth and improve its offering both for clients and merchants. However, this has entailed heavy cash burn, as the growth strategy is predicated on expanding the logistics infrastructure to make the platform more attractive to both buyers and merchants. This has meant massive investments and suboptimal capacity utilization now to secure GMV growth going forward. We have updated our financial model for Ozon and maintain our HOLD recommendation. We use a 0.7 2022E EV/GMV multiple (the average across EM e-commerce) to value Ozon. Our new 12-month target price is down 44% at $37.40 per ADS (R2,752), implying 20% upside. While we believe that Ozon could deserve a higher multiple if it is able to develop a fintech or entertainment offering (to secure improved retention), we think investors will probably wait to see if the company is able to execute in these areas.> GMV growth continues... Ozon posted decent 145% y-o-y GMV growth and 239% order growth in 3Q21. With the 87% y-o-y increase in buyers on the platform and 50% increase in order frequency, it seems Ozon's strategy to attract customers is working. It is also bringing in merchants and now has more than 60k sellers on the platform (up more than 200% y-o-y), while 3P GMV accounted for 67% of the 3Q21 total.> ... but has required more cash. The growth has come at a cost. With all of the capex and lease expenses required to ramp up the logistics infrastructure and fuel GMV growth, we see Ozon's adjusted EBITDA remaining negative until 2024 amid suboptimal capacity utilization. We expect operating cash flow to turn positive in 2023.> Not well positioned given current macro backdrop. Since EBITDA will likely remain in the red for some time to come, Ozon is probably one of the most sensitive names in the space to higher interest rates. As opposed to other public names making big investments in e-commerce (e.g. Yandex and Sber), it does not have a cash-generating business to cover the cash burn needed to ramp up.> Valuation. We use an average 0.7 EV/GMV multiple for EM peers to value Ozon. Though the company offers way higher growth, we expect negative EBITDA to persist until 2023-24, which makes the stock vulnerable in an environment of higher rates, in our view.