Overall retail sales have been hit by lockdowns and the need to maintain social distancing, the ecommerce segment, which includes pureplays as well as traditional retailers with ecommerce capabilities, has flourished.
The Commerce Department says ecommerce sales in the last quarter were 44% above 2Q19, the second highest ever. As a result, ecommerce accounted for over 20% of total U.S. retail sales.
It’s now clear that the race to digitization is accelerating, consumer habits are altering for good and supply chains are adjusting to help the two sides meet.
In this environment, the rising tide should lift all boats. But we particularly like JD.com (JD), Wayfair (W), Fiverr (FVRR), Stamps.com (STMP) and Cars.com (CARS).
About The Industry
Electronic-commerce, the method of buying and selling goods and services via a software platform, continues to evolve as the technologies driving it get more advanced.
On the one side are user devices, which are getting bigger, brighter and more capable. Voice-controlled devices like smartwatches and smart home devices like Amazon Echo, Google Home and Apple HomePod are joining these to facilitate conversational commerce.
On the other side are the software platforms facilitating the transaction, which are getting AI-enabled, sometimes including AR/VR and getting generally more sophisticated, and therefore, more capable of delivering a satisfying user experience. Social commerce is developing into a major trend as are chatbots that facilitate back-end operations and customer care.
Differentiation in the industry comes from better technology for improved showcasing, easier navigation and payment, speedier delivery and returns, brand building, comparison shopping, loyalty and so forth, which generally tip the scale in favor of larger players. Particularly because there is fierce price competition necessitating deep discounting, which keeps prices down.
A peculiarity of the market is Amazon’s complete dominance in the U.S. and its growing presence in other important markets. This is driving some traditional players to partner with Amazon while others partner with Alphabet’s Google to fill technology gaps. Expedia, eBay, and Chinese companies Alibaba and JD.com are other significant players.
Factors Shaping the Future of the Internet-Commerce industry:
The pandemic has proved extremely beneficial for ecommerce players, with government-mandated stay-home orders leading to soaring business volumes. With markets opening up across the country, customers are going beyond essentials to order other things they need to function. Just like many companies temporarily adopting work-from-home practices are expected to make it a broader trend, shoppers are also likely to keep away from stores just to be safe. One thing this trend should boost (if technology companies are up to it) is the adoption of AR/VR technology because of its potential to greatly enhance showcasing. In fact, the ability to fit things like furniture or other items where they want it in their homes is better even than physical retail. More stores can be converted into delivery hubs to facilitate this trend.
eMarketer expects ecommerce sales to contribute 14.5% to total U.S. retail sales this year. Excluding gasoline and auto, the expected contribution is over 20%. Health, personal care & beauty (to grow 32.4% this year) is the most significant category after food & beverage (which will grow 58.5%). Buying household essentials online is likely to be a sustained trend. The weakest segment of the industry and the one that will recover only very gradually is the online travel space, where companies like Expedia and TripAdvisor are major players. Social distancing is still considered a must for most people, so they are sticking with options like road trips or personal boats while avoiding long-distance travel using public transport, hotels and restaurants.
Both ecommerce pureplays and traditional retailers branching into ecommerce are seeing a surge in ecommerce sales. However, physical presence remains important because it is only proximity to a consumer that can facilitate quick delivery. So the trend moving retailers toward a hybrid/omnichannel model that customers can get quick delivery from, or from where they can pick up the items ordered online (BOPIS, curbside pickup), at their convenience, and through apps arranging personal shoppers, is likely to remain. Self-driven delivery vehicles and drones are already on the horizon to deal with logistics problems and make deliveries smoother and cheaper.
Also, data mining has never been easier. Because of the many details involved in satisfying a customer, data mining has grown in importance over the years, with the party controlling the customer’s data being best positioned to identify and service demand while also delivering the desired experience. Most of the big ecommerce players are also into payments processing, which gives them further insight into a customer’s tastes, preferences and buying habits. As machines read and process this data, they can create programs and processes to maximize customer satisfaction and drive sales. In the near future, more and more retailers will harness big data to boost their prospects.
Most players saw supply chain issues going into the pandemic. One major reason for this was the concentration of the supply chain in Asia, mainly China. But it wasn’t the only reason. Customer buying habits changed materially overnight even as production lines came to a standstill and were later slowed down to comply with safety guidelines. So supply chain adjustments continue.
All said, revenue growth rates may be expected to remain very strong as a result of more companies moving online and existing players utilizing more advanced tools and analytics to increase their return on investment. But profitability could come in for some pressure (for some) as companies invest heavily in building out infrastructure to support the strong revenue growth and also comply with safety guidelines.
Experiential retail is also likely to be an important area of investment for retailers. Another pressure on profitability for big retailers, at least in the immediate future, is the inability to generate the kind of ad revenue that they were doing before the pandemic hit. Most businesses are following policies of thrift and that generally means a cutback in marketing spend.
Zacks Industry Rank Reflects The Strong Prospects
The Zacks Electronic - Commerce Industry is a rather large group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rank #70, which places it at the top 28% of more than 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of its relative performance versus others. As far as aggregate estimate revisions are concerned, it appears that analysts are still expecting earnings to decline this year and the next. The net decline in the earnings estimate is 13.6% in 2020 (it was expected to decline 37.3% in May) and 25.2% in 2021 (it was 29.8% in May). Revenue is currently expected to be up10.8% in 2020 and up 6.5% in 2021. The delta is likely attributable to increased cost of operation and amortization and other charges related to infrastructure buildup.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Leads on Shareholder Returns
The Zacks Electronic - Commerce Industry is trading at a premium to both the broader Zacks Retail and Wholesale Sector as well as the S&P 500 index over the past year.
So we see that the stocks in this industry have collectively gained 64.1% over the past year, compared to the broader Zacks Retail and Wholesale Sector’s 35.9% and while the Zacks S&P 500 Composite’s 13.1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-sales (P/S) ratio, which is a more appropriate valuation criterion in the current situation, we see that the industry is currently trading at 5.69X, much higher than the S&P 500’s 4.53X and also above the sector’s forward-12-month P/S of 1.38X.
Over the past five years, the industry has traded as high as 6.93X, as low as 3.97X and at the median of 5.23X, as the chart below shows.
Forward 12 Month Price-to-Sales (P/S) Ratio
5 Stocks With Strong Growth Prospects
JD.com, Inc. (JD): Through its website www.jd.com and mobile applications, JD offers a broad selection of products to customers in China. The company is the second largest ecommerce company in China after Alibaba.
JD’s leadership in the fragmented and fast-growing Chinese ecommerce market, the breadth of its products and particular strength in electronics, continued innovation and ability to cater to strong demand following the pandemic are expected to generate very strong results in the foreseeable future.
The Zacks Consensus Estimate for the current-year EPS is up 20.8% in the last 7 days.
The Zacks Rank #1 (Strong Buy) stock is up 147.0% over the past year.
Price and Consensus: JD
Stamps.com Inc. (STMP): This provider of Internet-based custom postage and mailing and shipping services to small and medium business owners is seeing strong growth on the back of growing ecommerce.
The strong results and stronger guidance sent this Zacks Rank #1 company’s current year EPS estimate up 57.6% in the last 60 days.
STMP shares are up 181.3% over the past year.
Price and Consensus: STMP
Cars.com Inc. (CARS): The company has an online platform that lists new and used vehicles, and offers expert and user reviews, as well as other research tools and information.
While estimates still lag year-ago numbers, the company is seeing very strong rebound in sales of both new (up 49% from April lows) and used cars (up 102% from March lows) as well as strong double-digit growth in traffic and user engagement. Relatively low inventories are leading to record strength in prices across new and used vehicles.
After a solid beat of over 119% in the last quarter, the current year EPS estimate of this Zacks Rank #2 stock went from a loss of 6 cents to earnings of $1.22.
The shares are down 20.7% from last year but up 37.6% from the March lows.
Price and Consensus: CARS
Wayfair Inc. (W): One of the leading global providers of home furnishing and décor, Wayfair is seeing strong demand from the at-home economy. Longer-term drivers (that are also operative at the moment) are the increased propensity to buy such things online, especially as millennials are entering the purchasing age group.
The Zacks Consensus Estimate for the current-year EPS has gone from a loss of $4.16 60 days ago to $2.34 today.
The Zacks Rank #2 stock has gained 101.6% over the past year.
Price and Consensus: W
Fiverr International Lt. (FVRR): Fiverr is an online marketplace offering logo, poster and brochure designing, as well as photoshop editing, content marketing, web analytics and translation services.
The company is growing its buyer community and the spend per buyer is also increasing. The launch of its new Fiverr Business account should bring larger spenders on board. The pandemic has given legs to the remote working segment and Fiverr looks very well positioned to capture the opportunity.
The Zacks Consensus Estimate for the current-year EPS has gone from a loss of 31 cents to earnings of 21 cents.
The Zacks Rank #2 stock has gained 502.0% over the past year (442.1% since March due to the surge in the work from home segment).
Price and Consensus: FVRR
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Wayfair Inc. (W) : Free Stock Analysis Report
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Fiverr International Lt. (FVRR) : Free Stock Analysis Report
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