Zacks Industry Outlook Highlights: Amazon, Pinduoduo, Revolve Group and Just Eat Takeaway.com

For Immediate Release

Chicago, IL – October 12, 2021 – Today, Zacks Equity Research discusses Ecommerce, including Amazon.com, Inc. AMZN, Pinduoduo Inc. PDD, Revolve Group, Inc. RVLV and Just Eat Takeaway.com N.V. GRUB.

Link: https://www.zacks.com/commentary/1809417/3-bets-on-the-fast-growing-overvalued-ecommerce-industry

The need for social distancing has become less of a driver for the ecommerce segment, which includes pureplays as well as traditional retailers with ecommerce capabilities. That’s because, as estimates from the Commerce Department indicate, some of the traffic that moved online during the initial months of the pandemic is moving back to stores.
 
Accordingly, ecommerce sales in the last quarter were 9.1% above 2Q20 (up 3.3% sequentially), with total retail sales increasing 28.2% (up 5.2% sequentially). Ecommerce accounted for around 13.3% of total U.S. retail sales, which is a tad lower than the preceding two quarters and also lower than the 15.7% share in the year-ago quarter. This year’s moderation in absolute growth numbers is because of difficult comps.

Ecommerce continues to grow strongly off a smaller base growing its share of the total retail pie. And this is helped by the race to digitization, consumer habits altering for good and supply chains adjusting to help the two sides meet.

So, growth is less of a negative for this group as is valuation, which remains rich despite the sell-off in the last few months. Stocks worth considering now are PDD, RVLV and GRUB.

About the Industry

Electronic-commerce continues to evolve as the technologies driving it advance.

On the one side are increasingly powerful and capable user devices. On the other are sophisticated, AI-enabled software platforms facilitating transactions that are thereby, more capable of delivering user satisfaction. Social commerce and chatbots are further facilitating things.

Differentiation comes from better technology for improved showcasing, easier navigation and payment, speedier delivery and returns, brand building, comparison shopping, loyalty, etc. which generally tip the scales in favor of larger players. Particularly because there is fierce price competition necessitating deep discounting, which keeps prices down.

Amazon’s dominates, traditional players are rapidly digitizing even as new players continue to emerge.

Factors Shaping the Internet-Commerce Industry

·        The pandemic has proved extremely beneficial for ecommerce players, and not just because of the government-mandated stay-home orders that led to soaring business volumes. While markets have reopened to a large extent, purchasing trends haven’t gone back to where they were before. Just like many companies temporarily adopting work-from-home practices are expected to make it a broader trend, many shoppers that preferred going to stores earlier have now had a taste of the convenience of online shopping. And as far as retailers are concerned, the importance of having a digital presence has never been clearer. 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. The technology is already being leveraged very effectively in the housing market. Also, the ability to fit things like furniture or other items where people want it in their homes is better even than physical retail. More stores will likely be converted into delivery hubs to facilitate this trend.

·        As American companies like Amazon and Walmart continue their march to conquer the world, it’s relevant for this outlook to include data that goes beyond the borders. So, according to eMarketer’s projections, global retail ecommerce is expected to decelerate from 25.7% growth in 2020 to 16.8% growth in 2021 with India, Brazil, Russia and Argentina growing the fastest, by at least 26%. Total retail sales are expected to go from down 2.8% to up 6.0%. Ecommerce will grow its share of total global retail sales from an estimated 19.6% this year to 24.5% in 2025. eMarketer has updated its U.S. market expectations for 2021. It expects U.S. ecommerce sales to grow 17.9% this year for a 15.3% share of the total market. The share is expected to increase in every year, reaching 23.6% by 2025. The categories expected to see the strongest ecommerce growth this year include apparel and accessories (to grow 23.1%, only category that’s expected to be stronger than 2020) and food/beverage, health and personal care (the only segments to grow more than 20%). Amazon’s share of U.S. ecommerce is expected to be 41.4% in 2021 with 63.4% of U.S. households using Amazon Prime (that’s up from 35.6% in 2016). This year, traditional retailers will double down on digital initiatives including click and collect, cashierless checkout, contactless payment and digital signage while online retailers focus on social commerce, grocery sales and the buy-now-pay-later option.

·        Both ecommerce pure plays 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. Artificial intelligence such as that used by companies like Amazon already decides how competitive a player is. But as time goes by, more and more retailers are jumping on board and harnessing big data that has become imperative for survival.

·        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.

Zacks Industry Rank Reflects Weak Near-Term Growth

The Zacks Electronic - Commerce Industry is a rather large group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rank of #183, which places it in the bottom 27% 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 bottom 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 expect earnings to decline this year and the next on revenue that will also decline, although at a lower rate.

The net decline in the 2021 and 2022 earnings estimates are 48.0% and 56.5%. The net decline in the revenue estimate is 19.5% for 2021 and 3.4% for 2022. The delta is mostly because of difficult comps, coming off the extremely strong 2020 results, on top of the 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 Lags on Shareholder Returns

The Zacks Electronic - Commerce Industry is trading at a discount to both the broader Zacks Retail and Wholesale Sector as well as the S&P 500 index over the past year. This is because of the changing sentiment, as physical stores open up, taking back some of the sales that moved online during the pandemic.

So we see that the stocks in this industry have collectively lost 37.5% of their value over the past year, compared to the broader Zacks Retail and Wholesale Sector, which lost 12.1% and the S&P 500, which gained 25.9%.

Industry's Current Valuation

On the price-to-forward 12 months’ earnings (P/E) basis, the industry still looks grossly overvalued (45.12X) with respect to both the S&P 500 (20.97X) and the broader retail sector (26.57X).

On the basis of forward 12 months’ sales (P/S) however, the industry’s multiple of 3.51 X trails the S&P 500’s 4.80X although it remains understandably higher than the sector’s 1.29X. Over the past year, the industry has traded as high as 5.66X, as low as 3.42X and at the median of 4.24X.

3 Stocks Standing Out

Pinduoduo: Shanghai, China-based Pinduoduo is the biggest online marketplace for agricultural products (mainly from small-scale farmers) in China. The company seeks to improve the productivity and efficiency of the agriculture industry supply chain while bringing Chinese agricultural communities into the digital age. At the end of 2020, the company had 8.6 million active merchants, both agricultural and otherwise, and 788.4 million active buyers on its platform.

The company deals in a range of products, including apparel, shoes, bags, mother and childcare products, food and beverage, fresh produce, electronic appliances, furniture and household goods, cosmetics and other personal care items, sports and fitness items, and auto accessories.

The user base is expanded by employing a group buying system wherein discounts and deals are offered to large groups. This automatically leads to the promotion of the platform on the one hand, which rapidly increases the user base (from 418.5 million in 2018 to 585.2 million in 2019 to the current level).

Users are also more engaged and active when it comes to resolving supply chain issues. The quick feedback mechanism also helps merchants to adjust their merchandise efficiently and well. The wealth thus created and distributed should only endear it to the Chinese government.

The Zacks Rank #1 (Strong Buy) company’s results continue to improve and analysts appear extremely optimistic about its growth prospects. So they have taken their 2021 estimate of a 19 cent per share loss to a 67 cent per share profit within the last 60 days. The 2022 estimated earnings is up 54.4% in the last 60 days.

The shares are up 13.6% over the past year.

Revolve Group: Cerritos, California-based Revolve Group sells fashion apparel and accessories online through its REVOLVE and FORWARD operating segments. Its platform connects consumers, global fashion influencers and emerging, established and owned brands.

Last month, the company signed on supermodel Kendall Jenner as Forward’s creative director in a bid to expand its presence in the luxury segment. Jenner belongs to the Kardashian family. She is a huge social media influencer with around 186 million Instagram followers. Since Revolve relies on influencers to promote its premium wares to the millennial and Generation Z consumers it typically targets, she is particularly well positioned to steer the company’s future with emerging designers and brands. So this is a pretty big deal for the company.

The company also expanded into the health and wellness category by virtue of a new deal with Hims & Hers, a multi-specialty telehealth platform offering modern personalized health and wellness experiences. It’s expected that Hims & Hers’ affordable, high-quality solutions will appeal to the young demographic the company typically targets.

The Zacks Consensus Estimate for the current-year EPS is up 20.9% in the last 90 days while the estimate for the following year is up 12.4%. The Zacks Rank #1 (Hold) stock is up 279.9% over the past year.

Just Eat Takeaway.com: Amsterdam, the Netherlands-based Just Eat operates an online food delivery marketplace, connecting consumers and restaurants through its platforms. It has operations across most European countries, Australia and the U.S. (through its Grub Hub acquisition earlier this year). As of last year, it had 244,000 restaurants on its network that generated 588 million orders.

But GRUB is on an aggressive expansion drive, which is leading to huge growth in the restaurants affiliated with it, the orders delivered and the order value. However, discounts and promotions are a pressure on margins.

Another point to keep in mind is the increasing level of regulatory scrutiny, particularly in the U.S. where some state regulators are looking to cap the fees that delivery companies can charge restaurants, mandating the sharing of customer details like names, phone numbers, mailing addresses and purchase histories when requested by restaurants and requiring delivery companies to break down their charges for consumers.

The aggressive expansion is telling on this Zacks Rank #2 (Buy) stock’s estimates, which therefore don’t look too encouraging at the moment.

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