D-MARKET Electronic Services & Trading (NASDAQ:HEPS) operates the “Hepsiburada” e-commerce platform as the market leader in Turkey. Despite challenging economic conditions in the region, the company is capturing strong growth by consolidating its position in online retail along with Fintech services.

Indeed, the company’s latest quarterly result was highlighted by impressive operating trends with improving margins. Beyond FX volatility as the major risk when looking at this stock, our take is that HEPS is supported by a positive long-term outlook. The stock has gained momentum this year and we see room for the rally to continue into 2024.

HEPS Earnings Recap

Hepsiburada reported Q3 revenue of TRY 8.5 billion (approximately $290 million at the current Lira to Dollar exchange rate), up 52% year-over-year.

Keep in mind that given the extreme and persistent inflationary condition in the country with Turkey’s CPI last reported at 61%, financial results are reported on an adjusted basis, effectively restating the prior year’s results. The point here is to say that the sales level and other metrics suggest a “real” growth above the higher price level impact.

Operationally, what stands out is the gross merchandise value (GMV) at TRY 25.7 billion was up 45% y/y driven by a 55.1% increase in the number of orders. Reconciling the pace of a 1.5% increase in active customers, the implication is that users are spending more on the platform with more orders.

Favorably, EBITDA ticked marginally positive this quarter to a 0.3% margin in terms of the GMV, with the trend over the first nine months of the year reversing a large loss in 2022. Free cash flow is also significantly higher which helps explain the newfound optimism towards the company and rally in the stock compared to the weaker trends last year.

Keep in mind that Hepsiburada is more than just an e-commerce destination. The company is also finding success through its “hepsipay” mobile wallet and payments solution. Management notes that the product has registered 13.2 million wallet customers with growth in areas like lending along with an increasingly popular “buy now pay later” option.

There is also a separate “hepsiJet” logistical operation delivering an increasing level of parcels transacted by platform merchants including last-mile delivery. The idea is to leverage the infrastructure through a flywheel of growth.

In terms of guidance, the message by management is to expect firm margins with a focus on “profitable growth”. For the full year 2023, the target is to double unadjusted GMV as compared to 2022 while the company expects to reach an EBITDA margin as a percentage of GMV of around 1.5%.

The company noted that trends into Q4 included a record Singles Day holiday spending with the number of orders and GMV in absolute terms. The paid premium membership for customers to receive free delivery has also seen some strength, reaching the current level of 2 million customers.

The following comments by CEO Nilhan Onal Gökçetekin in the earnings conference call covered these points:

I can say, we are extremely committed to sustainable, profitable growth. We have built a very strong initiative pipeline for ’24 and also upcoming years in-line with the presentation we have done, that is including Hepsi advertising platform, that’s including non-electronics in our mix, that is including incremental margin from our services and B2B revenues that will continue to enhance our margin situation

Finally, we can mention that Hepsiburada ended the quarter with TRY 5.7 billion in cash and cash equivalents (representing approximately $210 million). The company notes that approximately 80% of this amount is held in U.S. Dollars which is supportive of financial stability. This level compared to just $16 million in debt, denominated in Turkish Lira.

Overall, we view the balance sheet position as a strong point in the company’s investment profile at a current market cap of $540 million.

What’s Next For HEPS?

What we like about HEPS is the sense that Turkey remains a high-growth market opportunity for e-commerce and Fintech based on secular tailwinds beyond the volatile economy. Simply put, online retail continues to capture a larger share of consumer spending over traditional brick-and-mortar alternatives. What we have here is an ongoing digitization of the economy.

The climbing frequency of transactions with a growing active customer base can support further growth going forward. The data shows that Hepsiburada is the country leader in e-commerce with a 27% market share, which is well above Amazon.com Inc’s (AMZN) 5% position in 2022. The understanding is that the company’s localized presence and cultural connection are at an advantage.

The latest data suggests Turkey’s GDP grew by 5.9% in Q3 but is expected to slow into 2024 as the Central Bank continues to hike interest rates in its effort to control inflation. Nevertheless, the Turkish government is targeting GDP growth of 4.5% between 2024 and 2026, supported by strong export growth and an uptick in tourism.

These trends are expected to narrow both the current account and fiscal deficit as a positive for the economy. The bigger point here is that a country with a population near 90 million people still represents a vibrant demand for merchandise.

HEPS May Be Undervalued

Going through the current consensus, the forecast is for HEPS to average revenue growth above 30% over the next two years. The expectation is that EPS will also trend higher through 2025. Considering the latest trends and optimism by management projected in the earnings conference call, we believe this top-line outlook is reasonable given the several moving parts.

The metrics we’re looking at suggest the stock is trading at a 30x forward P/E or around 11x on an EV to forward adjusted EBITDA basis.

These levels are compelling for a high-growth stock and are also reflected in Seeking Alpha’s quant ratings, where HEPS is ranked number 2 out of 31 within the “broad-line retail” industry. With the latest financial trends, the stock scores well in factors related to growth and adjusted profitability.

The ((A+)) grade in momentum considers that shares are up more than 120% over the past year which is often a strong signal for further gains with an apparent market stamp of approval on the company’s outlook. The ((B+)) factor grade on revisions reflects that the consensus estimates have trended higher over the last 3 months.

Risks To Consider

That being said, the elephant in the room is Turkey’s country’s risk and exposure to FX volatility. The recently re-elected Erdoğan Presidential administration has a questionable record of governance with various policy failures over the past decade, opening the door for a layer of skepticism on Turkey’s future.

A scenario where the Turkish economy falls into a deepening recession would undermine the earnings outlook for Hepsiburada by impacting demand on its platform. While an expected depreciation of the Turkish Lira is likely already incorporated into HEPS consensus estimates, global macro volatility or some form of new financial crisis would accelerate the currency selloff.

HEPS Stock Price Forecast

We rate HEPS as a buy with a price target of $2.50 for the year ahead implying a forward P/E of 50x on the consensus 2023 EPS of $0.05. The combination of the strong operating trends and messaging by management to focus on profitability should be enough to extend the recent rally in shares through 2024.

The way we see it playing out is that a macro rebound as global interest rates pullback should be positive for emerging markets that can lift sentiment toward these more speculative areas of growth.

Looking ahead, the potential that Hepsiburada will consolidate its market share and capture new growth opportunities by expanding into new segments highlights what we believe is a positive long-term outlook.

Monitoring points over the next several quarters include performance metrics like the number of active customers, GMV growth, EBITDA margin, and free cash flow trends. The bullish case here is that results ultimately outperform expectations translating into an expansion of valuation multiples.