The novel coronavirus, or COVID19, has blind-sided the world, as the virus outbreak continues to spread and disrupt the global economy. It is fair to say that some countries have had better responses to the outbreak than others, but every single country has made missteps while handling the pandemic.
As of March 19, 2020, there are 228,451 global cases of coronavirus, with 9,357 deaths and 86,254 recoveries. According to the World Health Organization, COVID19 has a global death rate of around 3.4%, up from an initial estimate of 2% in early March 2020.
However, there is some good new beginning to emerge from the pandemic. For the first time since the outbreak began in December 2019, China reported no new domestic cases of coronavirus on Thursday, March 19, 2020. This marks the fifth consecutive day where China is seeing a noticeable drop in new infections, which gives experts hope that the outbreak is beginning to subside in China.
With global markets facing severe losses, China’s stock market has quietly been outperforming in recent weeks. For companies that do business in China, like Mohawk Group Holdings, Inc. (NASDAQ: MWK), this is a welcoming sign, which could see manufacturing and production activity return to normal in the coming weeks.
Companies With Chinese Exposure Coming Back Into Focus
China is beginning to attract attention again, as economic activity begins to normalize. Major Chinese companies like Baidu, Inc. (NASDAQ: BIDU), JD.com (NASDAQ: JD), and Pinduoduo.com (NASDAQ: PDD), have all made upbeat comments in recent weeks regarding seeing activity beginning to revert to normal.
As a result, “China-related equities could serve as a good option to hedge against the current market turmoil,” according to Aiden Research. While Aiden does note that anything is possible, such as a resurgence of the outbreak and a global recession, but given the current landscape of the virus’s spread and relative economic activity, China is one area that is beginning to shine again.
Chinese manufacturing and production activities are estimated to be running back at normal capacity by the end of March, according to major manufacturing firms like Foxconn Technology. This will help the technology supply chain recover, after being severely disrupted over the past several months.
Mohawk Group is one such company with ties to China, which could see a boost as economic activity returns to normal. The company has manufacturing partnerships in China, which are responsible for developing and producing Mohawk’s consumer products. China also represents an important location for Mohawk in terms of sales. Mohawk has a team based out of Shenzhen, China as well, which is considered the “Chinese Silicon Valley.” With workers beginning to return and activity normalizing, e-commerce should see a healthy rebound as well.
MWK: Strong Outlook Despite Potential Virus Headwinds, Positive Adj. EBITDA Still Seen For Q3 2020
In Mohawk’s recent earnings conference call, management spoke to shareholders regarding recent results, 2020 outlook, and impact from the coronavirus outbreak. During full-year 2019, Mohawk saw revenues surge 56.2% to $114.5 million, compared to $73.2 million a year ago. The growth came as a result of increases in direct sales volume from existing and new products.
For full-year 2020, management issued net revenue estimates in the range of $160 million to $170 million, as new product launches from 2019 and 2020 help drive new sales. Management noted that this outlook does include any “potential inventory constraints for existing products and potential delays in new product launches primarily in the second half of the year, due to the impact from COVID19,” according to the recent earnings call. However, the company does still estimate positive-adjusted EBITDA to be reported during the third quarter of 2020.
“As I look forward to 2020, I see many signs pointing to an acceleration of the market-based business model and a massive opportunity to capitalize on a formidable transformation in one of the world’s largest industries. We’re looking to build a very large and profitable company and consider ourselves in very early stages of this journey. It will take time for many to understand us and probably in hindsight, only some will realize what we’re seeing now. Myself and the management team are committed to this journey,” noted Mohawk CEO Yaniv Sarig during the conference call.
Mohawk’s Third-Party Logistics Providers Allows Company to Side-Step Amazon Fulfillment Shutdown, Offer One-Day Prime Shipping Coverage to 90% of Continental U.S.
For retailers across the world, it has been “all hands-on deck.” Essential household items are flying off the shelves, as consumers hoard due to virus outbreak fears. As a result of the increased demand for household staple and essential items, some retailers are blocking inventory buildup for non-essential items, in an effort to give more warehouse space to the critical items.
Amazon is one such company that has recently announced that its warehouses will only accept essential supplies. This essentially means that Amazon’s fulfillment services are shutdown to a majority of businesses, unless they happen to produce or supply consumer staples. Amazon says it will continue to prioritize essential items in its warehouses until April 5, 2020. This means Amazon shoppers could see longer delays on items such as electronics and clothing.
Fortunately for Mohawk Group, the company’s efforts to build a third-party operational and shipping warehouse network through logistics providers, will help the company side-step the shutdown at Amazon. As noted in the recent earnings call, Mohawk currently has access to eight operational and shipping warehouses, with a ninth location planning to become operational at the end of March.
This third-party logistical network means Mohawk will have “one-day prime shipping coverage of over 90% of the continental U.S. population,” according to management.
On March 20, 2020, Mohawk announced that it is making its proprietary AIMEE AI-based platform available to other Amazon sellers and businesses that rely on its fulfillment services during the shutdown.
“Yaniv Sarig, Co-Founder and Chief Executive Officer of Mohawk Group, stated, “During these difficult times it is incumbent on us all to do our part to help alleviate the challenges currently facing everyone. Making the Mohawk AIMEE platform available to sellers who rely on Amazon’s fulfillment services will allow them to maintain operations, while freeing up Amazon to focus on delivering essential products, and all of this ultimately allowing consumers to stay at home and safe.”
In a time when Amazon is beginning to shift to one-day shipping options and closing off access temporarily to non-essential items, the Mohawk management team’s insight to diversify beyond Amazon fulfillment was genius.
Overall, the global sell-off has gotten extremely out-of-control. We are now in a state of over-correction, as we have seen years’ worth of gains evaporate in just a few weeks. With China rebounding from the coronavirus outbreak, some analysts and equity research analysts are seeing the country as a potential hedge against the global turmoil currently taking place in other equity markets.
Mohawk is one such company that has been unfairly-beaten down with the broader market. The recent earnings call provided several strong silver linings for the company and its future, which is only further supported by rebounding economic activity in China. Mohawk looks to be severely cheap currently, as the company prepares for a strong 2020 and potential positive adjusted EBITDA coming in the third quarter. Chaos creates opportunity, Chinese-related equities appear to be enticing in the current market landscape.
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