Allegro: Launching Coverage With Wide Moat Rating, PLN 37 Fair Value Estimate; Shares Slightly Cheap

We’re launching coverage of Allegro ALE with a wide moat rating and PLN 37 fair value estimate, leaving shares trading at a 12% discount to our intrinsic valuation. The Polish holding company is well-positioned to capitalize on e-commerce growth in Central and Eastern Europe, boasting exposure to the Czech Republic, Croatia, Slovakia, Slovenia, and Hungary following its Mall Group acquisition, which was consummated during the first quarter of 2022. We foresee a robust, long-term growth runway, with our forecasts calling for a 12% 10-year sales CAGR, driven by 11% annual growth in gross merchandise volume and modest take rate expansion. While the firm faces competition from large, multinational competitors like wide-moat Amazon and wide-moat Alibaba in its home market, we believe that investments in its Prime-like loyalty program, Smart, managed fulfillment, an improved buyer protection program, and auxiliary financial services will prove sufficient to defend its home turf--a view corroborated by ongoing web traffic outperformance relative to Amazon and the exit of no-moat Sea Limited from the Polish market.

We award Allegro a wide moat rating built around a marketplace network effect, with the Allegro.pl platform facilitating PLN 52.5 billion in GMV in 2022 (approximately $13 billion) between 14 million active buyers and 133,000 active sellers in the firm’s home market. Allegro’s market penetration is extremely impressive, with 35%-40% of 38 million Poles, 50% of the internet-using population, and 65% of Polish residents who make purchases online transacting through the Allegro platform over the past year, miles ahead of the 15% tipping point we’ve estimated for e-commerce marketplace entrenchment in prior research. More importantly, that penetration has resulted in effective monetization, with 24% adjusted ROICs (excluding goodwill) over the past half decade healthily edging our estimated 10.4% cost of capital for the operator.