Just when you thought B2B software SPACs were so last year, along comes another one, Freightos, an international shipping platform. If you are interested in SPACs, the freight industry, or marketplaces, I highly recommend the company’s recent SEC Filing.
The Logistics Market is a Marketplace Maker
Whether you call them platforms, marketplaces, or networks, few verticals have spawned more successful businesses of this type than the freight industry. The freight business has all the elements you need to build a multi-sided platform:
- Gigantic size. The US trucking industry is pegged at $800 billion annually. Add in the global markets of airline and ocean freight and you get to nearly $1.5 Trillion. More good news: international freight tends to grow faster than GDP–or at least it used to!
- High fragmentation in most markets. The trucking, air, and freight forwarding markets are notoriously fragmented both on the shipper (400,000 plus shippers!) and carrier sides. Only the ocean freight and parcel industries are concentrated.
- Low average ticket size. For the six months ending June 2022, Freighto’s average transaction was about $1,100. Small transactions have all sorts of benefits. In particular, they increase the value of automation as well as payments and financing opportunities.
- Perishable Capacity. Aggregating demand creates a lot of value for carriers. Freightos cites estimates that 50% of air cargo holds are empty. In theory, marketplaces can help more efficiently find and price excess capacity.
It’s no surprise then that the logistics market has created multiple successful platforms. To name just a few:
- Truckstop.com (trucking) ($1B market cap at last round)
- Transplace (trucking) (Acquired by Uber Freight for $550 million)
- Flexport (ocean and air) ($8 billion market cap at last round)
- e2open (international shipping and more) ($2 billion market cap)
The Freightos Platform
I love the way Freightos describes its business. The company provides an analogy to the passenger travel market, which I can relate to!
Freightos offers Webcargo to make it easy for freight forwarders (or shippers) to buy capacity from ocean, air, and now LTL carriers. The company likens this product to a Global Distribution System (GDS), such as Sabre or Amadeus in the consumer travel industry. Freightos points out that no GDS existed for air cargo and ocean freight. Webcargo is like a GDS because it typically connects carriers to the “middlemen”, not the end “consumer”, or shippers. Think of freight forwarders as travel agents for international freight, which has all sorts of complications we passengers do not. (Freight has more complicated customs (e.g., tariffs) and lots of handoffs between the truck, port, ship, another port, and truck, rail, etc.) (I’ve written about the GDS industry here and here.)
Freightos also offers Freightos.com for shippers (importers/exporters) to interact with freight forwarders. So the analogy for Freightos.com is Expedia or Booking.com, which we end consumers use as our OTA (online travel agent).
Finally, Freightos offers SaaS products to freight forwarders and airlines to help them run their businesses better. (In the case of freight forwarders, the SaaS product helps them prepare quotes for shippers.) Freightos also offers data subscriptions for tracking freight prices. You may have seen their free freight indices online. By virtue of these subscription businesses, Freightos describes itself as a “SaaS-enabled marketplace”, which it says:
has been used effectively by many leading platforms and marketplaces to increase engagement with platform participants and to create a deeper competitive moat. For example, Sabre and Amadeus provide software tools to travel agents, OpenTable provides software to restaurants, and Booking.com provides tools to hotels.
Freightos Business Model
How does Freightos intend to make money? Saas and data subscription revenue make up the majority of the revenues to date, but transactional fees, or take rate, on transactions processed through the Webcargo and Freightos.com platforms are growing faster and are expected to overtake SaaS revenue in 2023.
For the six months that ended June 2022, SaaS/DaaS revenue (the company calls it “solutions revenue”) was about two-thirds of Freightos’s $10 million in revenue. Freightos states that its renewal rate for SaaS products was 94.7%–which is really good. The SaaS products for freight forwarding and data both have a freemium model. (And yes, you read that right. This company is going public with a $20 million revenue run rate.)
The other third of revenue comes from transactional fees, or its take rate on the two platforms. Most of the take rate comes from the “sellers”–meaning carriers or freight forwarders–and relate to freight, insurance, or customs services the company offers directly by virtue of a recent acquisition. Freightos says of its take rate:
Currently, we have an average take rate, which we define as the quotient of net platform revenue divided by Gross Booking Value (GBV), of approximately 1.2%, but some categories of transactions have achieved a take rate of over 10% (including total revenue from Buyers and Sellers purchasing ancillary services).
What Must You Believe To Invest?
Valuing nascent marketplaces requires you to predict their long-term take rate, Gross Merchandise Value, and the trade-off between the two. I’ve written about this prediction process and trade-off here.
Freightos has been building this marketplace for 12 years and it is still a tiny company. That is actually not that unusual in B2B! The company argues that only in the last couple of years has it been able to reach a critical mass of air carriers (and it is still working on ocean carriers). The company says its flywheel is just starting to turn. Freightos has a run rate GBV of about $600 million and it will need to grow a couple of log cycles for it to really make money unless it increases its take rate dramatically as well.
The company shows how rapidly its GBV has been increasing over the past couple of years:
Evidence for Freightos’s ability to increase its take rate is more anecdotal. The company points out it has given the product free to sellers for a while before charging them fees. Having said that, there do seem to be many ways to increase take rates, including insurance, customs, and payments.
I’m going to wait before wading into this stock. Based on my investing track record, you might take this statement as a contra-indicator! (Remember, I passed on the IPOs of Google, Mastercard, and Amazon.) Also remember, this blog does not represent investment advice!
Why am I waiting?
- The historical data shows buying IPOs is generally a bad idea. Certainly, this is true for SPACs.
- Public markets usually don’t have the patience for B2B marketplace growth, so a couple of bad quarters and this stock may be cheaper!
- Freight prices are dropping like a rock right now, which can’t be good for GBV.
- For the year ended December 31, the top seller on the platform represented 20% of GBV, and the top 5 sellers represented 55% of GBV. This concentration actually increased over the prior year. I’d like to see a lot less concentration.
- The company already reduced its revenue projections for 2022-2025 by 10-20% since early 2022–and that is before it goes public!!
The SPAC sponsor hired Houlihan Lokey to analyze the valuation and growth prospects of the company. Houlihan looked at a lot of other marketplaces and platforms, though not that many were freight-related. If I were a little more ambitious, I’d compare the expected valuation and growth history to e2open, Descartes, and the last rounds for Truckstop, Transplace, Flexport, etc. Perhaps one of you is up for that?