3 Stocks with Promise as Ecommerce Growth Drops Off in 2021
The need for social distancing remains generally positive for the ecommerce segment, which includes pureplays as well as traditional retailers with ecommerce capabilities. However, estimates from the Commerce Department indicate that 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 36.7% above 3Q19 (down 1% sequentially), with total retail sales increasing 7.0% (up 12.0% sequentially). Ecommerce accounted for over 14.3% of total U.S. retail sales (it was 20%+ in the second quarter).
Despite these stats, there’s evidence that the race to digitization is accelerating, consumer habits are altering for good and supply chains are adjusting to help the two sides meet.
Given the very strong growth in 2020, we could expect flat to slightly down earnings this year because of more difficult comps. Certain names that still stand out are JD.com, ASOS plc, Jumia Tech, Monotaro and Overstock.com.
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 (AMZN) 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 (GOOGL) Google to fill technology gaps. Expedia (EXPE), eBay (EBAY), and Chinese companies Alibaba (BABA) and JD.com (JD) are other significant players.
Factors Shaping the Future of the Internet-Commerce industry:
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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. Markets have been open across the country for a couple of quarters now, but 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 are also likely to keep away from stores, at least until a broader vaccination of the population. 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.
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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 27.6% growth in 2020 to 14.3% growth in 2021 even as total retail sales go from down 3.0% to up 5.1%. The U.S. piece of ecommerce is expected to go from 32.4% growth last year to 6.1% this year while total retail improves from a decline of 3.2% to an increase of 1.6%. The categories experiencing strongest ecommerce growth in 2020 include consumer electronics; furniture and home furnishings; health, personal care & beauty; and food and beverages. The categories experiencing weakness include all kinds of traditional retail; auto, which however picked up quite strongly in the second half; all kinds of online booking for public travel and hospitality, hitting companies like Expedia and TripAdvisor; and apparel, which was however stronger than initially expected. 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.
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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.
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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 in the not-too-distant future, more and more retailers will jump on board and harnessing big data will 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. Experiential retail is also likely to be an important area of investment for retailers.
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 #199, which places it at the bottom 21% 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 be down slightly this year but grow strongly in the next.
The net decline in the 2021 and 2022 earnings estimates are 30.5% and 23.0%. The net decline in the revenue estimate for 2021 is 1.0% and the net increase for 2022 is 7.1%. 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 42.7% over the past year, compared to the broader Zacks Retail and Wholesale Sector’s 33.6% and the Zacks S&P 500 Composite’s 15.9%.
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 a 4.53X multiple, higher than the S&P 500’s 4.49X and understandably higher than the sector’s forward-12-month P/S of 1.32X.
Over the past year, the industry has traded as high as 5.69X, as low as 4.00X and at the median of 4.82X, as the chart below shows.
Forward 12 Month Price-to-Sales (P/S) Ratio
3 Stocks Standing Out
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 a penny in the last 30 days.
The Zacks Rank #2 (Buy) stock is up 126.2% over the past year.
Price Performance: JD
ASOS plc (ASOMY): This is a British provider of fashion goods including womenswear and menswear, footwear, accessories, jewelry and beauty and grooming products that are sold through its website, asos.com. It operates in the UK, France, Germany, Italy, Spain, Australia, the U.S., Russia and China.
The company has recently picked up the famous Topshop, Topman and Miss Selfridge brands from Arcadia, which went out of business. ASOS has also seen the same pandemic-driven surge in its results that other ecommerce players in the U.S. have seen. While the company is well positioned for growth this year, it primarily caters to young adults in their twenties, and there is some pandemic-driven unemployment risk in this group.
This Zacks Rank #2 company’s current year EPS estimate up 16.1% in the last 30 days.
Its shares are up 50.8% over the past year.
Price and Performance: ASOMY
Jumia Tehnologies AG (JMIA): Jumia is a German online retailer of dresses, leggings, skirts, polo shirts, belts, watches, sunglasses, health products, beauty products and a range of products for children, among other things to a number of countries in Africa.
The main positive for this company is its first-mover advantage in Africa, where there are a number of emerging economies. However, infrastructure isn’t the same as it is in the U.S. or Western Europe, so there are also challenges to its becoming the “Amazon of Africa” as it has often been referred to. The pandemic hasn’t moved the needle for Jumia in 2020, but this year could be different since there has been a resurgence in important markets like South Africa and Nigeria.
The company is yet to turn in a profit, but its per share loss for 2021 is down 1 cents in the last 60 days. It’s also down 38 cents from the estimated loss for 2020.
The shares are up 920.4% from last year and a short squeeze could be brewing.
Price Performance: JMIA
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Originally published