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Mohawk Group: Invest in a Proven AI Model that Outsmarts Rivals in E-Commerce

John Jannarone

Mohawk Group Holdings, Inc. Uses Algorithms to Design Products Such as the hOmeLabs Beverage Refrigerator and Cooler

  • Mohawk Group Targets Consumer Product Categories Where Rating Trumps Brand
  • Mohawk Uses AI to Improve Products, Market and Price Them Optimally
  • Mohawk Only Months Away from Positive EBITDA
  • Mohawk Trades at Deep Discount to High-Growth Technology Companies

By John Jannarone

As the great migration from brick-and-mortar to online shopping continues, top rankings have become the holy grail among consumer products companies vying for sales. For savvy investors, there is a chance to own a company that has cracked that code, and at a reasonable price to boot.

Meet Mohawk Group Holdings, Inc., a recent IPO that is revolutionizing the design, marketing and pricing of consumer products. The thesis behind the business: Consumers in categories such as home appliances, electronics, and beauty products have begun to search and purchase on third-party marketplaces around the world such Amazon.com, Inc., Alibaba Group Holding Limited’s Tmall, JD.com, Inc., and MercadoLibre, Inc. In turn, purchase decisions are based on data such as customer reviews and star ratings rather than brand name.

That created an opportunity for Mohawk to create algorithms to replace several elements of the consumer product lifecycle.  Take for instance Mohawk’s hOmelabs Beverage Refrigerator and Cooler (pictured above). It currently ranks at the top of the list of non-sponsored results in a search for “beverage refrigerator” on Amazon and has over 900 reviews, the vast majority of which are five out of five “stars.”

How did Mohawk get its refrigerator to rank so high? The credit goes not to focus groups or a crack design team but to the AIMEE (Artificial Intelligence Mohawk e-Commerce Engine) software platform. AIMEE uses data from marketplaces to identify the features of products that lead to success, allowing Mohawk to remove much of the guesswork in new designs. In total, Mohawk can deliver a product to market in six to eight months from the time the idea is generated, versus 18 to 24 months under the standard consumer products development model.

AIMEE’s work doesn’t end there. Once a typical product is launched under the traditional approach, an expensive and time-intensive marketing process begins, with agencies and other outside firms often spending months on advertising decisions. But AIMEE again uses data to decide the optimal placement of advertisements to drive search results in Amazon and other platforms while constantly adjusting price to drive maximum profit. Those decisions take a matter of minutes.

The result is a very high rate of success. Approximately 80% of the company’s products over the last year became profitable within three months of launch, the company said on its third-quarter conference call in November. The company defines such profitability by a positive “contribution margin” which accounts for all variable costs associated with a product, such as manufacturing and marketing but not fixed costs.

 

Another example of a successful product is the hOmeLabs 4,500 Sq. Ft Energy Star Dehumidifier. Similar to the beverage refrigerator, the product has over 5,000 reviews on Amazon and ranks at the top of the list under a search for 70 pint dehumidifiers. Importantly, the company can continue introducing products without adding headcount or other significant costs because the AIMEE platform is highly scalable and manufacturing is outsourced for every item.

Mohawk also continues to roll out listings on marketplaces across the globe. In the first quarter of 2020, Mohawk will begin selling on Tmall in China, where e-commerce sales are in the trillions of dollars annually and growing fast.

All that translates into a promising financial picture. Revenue surged 65% in the third quarter to $41 million – roughly the same pace it has maintained throughout the year. And more successful products have led to an overall positive contribution margin of 8%, up from 1.1% a year earlier.

As a result of the contribution margin offsetting fixed costs, the company now expects Ebitda to turn positive early in the second half of 2020. That should assuage any concerns about the company burning through its cash pile, given the company has minimal capital expenditures.

On top of the robust core business, there are other avenues for growth. One is to selectively acquire other marketplace “sellers” who have successful portfolios. The beauty of such deals is that Mohawk simply acquires the listings and manufacturing relationships and has no need to bring on additional staff. And with sellers trading around three times Ebitda, deals can be immediately accretive, even if Mohawk pays with all stock.

Another benefit of such acquisitions is that there is virtually zero integration risk. AIMEE actually helped evaluate a recent acquisition, Aussie Health, and immediately went to work on the company’s products maximize profit from them. Thanks to the company’s healthy balance sheet and promising cash-flow prospects, there should be ample room to seek out similar deals.

Also, Mohawk’s AI has great potential to be sold in a software-as-a-service (SaaS) fashion to other consumer products companies. Indeed, the company has already done so with Colgate-Palmolive Company and L’Oreal S.A. While such companies probably can’t use AIMEE as nimbly as Mohawk given their legacy manufacturing and sales structure (they sell generally sell through retailers not directly on marketplaces), there is potential to harness its power over time.

Another possibility is for Mohawk to offer its AI directly to manufacturers. That could allow manufacturers to quickly move products onto marketplace platforms around the world, selling directly to consumers for a higher margin. Such SaaS revenue, while less than 1% of Mohawk’s sales at the moment, is incredibly valuable and should command a rich multiple from investors as it grows.

Of course, investors might worry about Amazon creating an algorithm of its own with even better data. But Amazon has been selling private label items for years and the market is so big there’s enough room for many sellers to succeed. Amazon also generates very high margins from its third-party sellers and is unlikely interested in forcing them off its platform.

Mohawk shares, along with many technology IPOs in 2019, have fallen precipitously. The stock currently trades at enterprise value well below ½ of analysts’ 2020 expected sales. With so much potential for growth and profit on the immediate horizon, this deal is unlikely to last long.

John Jannarone, Editor-in-Chief

editor@IPO-Edge.com

www.IPO-Edge.com

Editor@IPO-Edge.com

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