Just when you thought momentum-stock mania was last year's news, along comes Hour Loop (HOUR -4.46%), which had a rocket ride on its first day of trading. On Jan. 6, Hour Loop priced its initial public offering (IPO) at $4 (collecting a cool $6 million worth of aggregate proceeds in the process), only to witness the share price nearly double to $7.99 on Jan. 7, IPO day.
Suddenly, a company that most traders had probably never heard of was trending. Meanwhile, the stock's upward trajectory continued over the ensuing days as investors pushed it to $9 and threatened $10 and beyond.
Now it's 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 another's, but it's riding on the back of an e-commerce giant -- and seems to be doing so successfully so far.
Image source: Getty Images.
If you can't beat 'em, join 'em
Hour Loop's business model answers the question: Why try to compete with e-commerce behemoth Amazon (AMZN -2.44%) when you can capitalize on its already established ecosystem instead?
If you shop on Amazon (and who doesn't nowadays?), there's a fair chance that you've indirectly dealt with Hour Loop without knowing it. Although the company has sold merchandise on its own website since 2013 and expanded its operations to Walmart's website in October 2020, Hour Loop has (by its own admission) generated practically all its revenue as a third-party seller on Amazon's platform.
Perhaps this helps explain why Hour Loop stock's Wall Street debut was so explosive. There are plenty of publicly traded e-commerce companies to choose from, but Hour Loop provides investors with a different angle: exposure to a mega-scale Amazon reseller.
How "mega?" Suffice it to say that Hour Loop manages more than 100,000 stock-keeping units (SKUs). Like Amazon itself, Hour Loop offers a broad variety of product categories ranging from home and garden decor to toys, kitchenware, apparel, and electronics.
The software is the edge
Hour Loop's primary strategy is to bring its vendors' product selections to customers. Beyond the large supply and wide variety of product offerings, however, Hour Loop also has a tech-centered competitive advantage among third-party Amazon sellers.
That advantage consists of Hour Loop's proprietary software system, which collects and processes large amounts of data daily to optimize the company's operations and sales. More specifically, this software identifies product gaps so that Hour Loop can keep its products in stock year-round -- especially during the crucial holiday season.
On top of that, Hour Loop deploys a proprietary automated pricing/repricing tool that analyzes sales trends, inventory costs, potential profits, competing offers, seasonality, and other metrics. With that, the tool can determine an "urgency level" for a product and then automatically adjust the product's price accordingly.
The price of dependence
Going forward, Hour Loop plans to expand its business by "rapidly" increasing its number of business managers, vendors, and SKUs. That's big talk for a newly IPO'd business: Does the company exhibit the financial growth required to back it up?
On the fiscal front, at least, it appears that Hour Loop is on the right track. In the six months ended June 30, 2021, the company generated $21 million in revenue, nearly doubling the $10.8 million from the year-earlier equivalent time frame. Turning to the bottom-line results, Hour Loop's net income of $2 million from the six months ended June 30, 2021 is a vast improvement over the $638,000 posted during the prior year's equivalent six-month period.
Hour Loop's greatest challenge will be its heavy reliance on Amazon, as that company can, on a whim, make business operations easier or more difficult for Hour Loop. In particular, Hour Loop acknowledges the risk that increases in Amazon's fee increases could impact Hour Loop's profit margins. Going forward, investors can keep one eye on Amazon's fee burdens on its sellers/resellers, and the other eye on the trajectory of Hour Loop's operating expenses, particularly in the "selling and marketing" category.
Staying in the loop
While the product selection of Hour Loop's vendors is wide, the company's business model is quite narrow. Plain and simple, Hour Loop uses proprietary tech tools to facilitate third-party selling on Amazon. But there's plenty of room within Amazon's massive e-commerce ecosystem for players like Hour Loop to thrive; the company's recent top- and bottom-line growth provide evidence of this.
Growth investors shouldn't always shy away when a share price doubles right out of the gate. I think, given the current financial picture, investors can hold onto this stock with a clean conscience. Just keep your finger on the eject button, as Amazon can make Hour Loop's life -- and hence, those of the company's stakeholders -- more difficult at any moment.