Attractive Prospects with Rich Valuation

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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 Amazon Echos, Google Homes and Apple HomePods 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 business comes from better technology for improved showcasing, easier navigation and payment, speedier delivery and returns, brand building, comparison shopping, loyalty and so forth. So larger players are relatively better positioned for growth. At the same time, 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 and others to partner with Alphabet’s (GOOGL) Google to fill technology gaps. Expedia (EXPE), eBay, and Chinese companies Alibaba and JD.com (JD) are other significant players.

Here are the three major themes in the industry:

  • The pandemic has proved extremely beneficial for ecommerce players, with government-mandated stay-home orders leading to soaring business volumes. Now that markets are beginning to open up, customers are likely to go beyond essentials and start ordering all the 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 that physical retail. More stores can be converted into delivery hubs to facilitate this trend.
  • Second, both ecommerce pureplays and traditional retailers branching into ecommerce realize the importance of physical presence because it is only proximity to a consumer that can facilitate quick delivery. So the trend moving retailers toward a hybrid/omnichannel model, where customers can get quick delivery or pick up the items ordered from a physical outlet close to them, at their convenience, 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. 
  • Third, 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.

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 as companies invest heavily in building out infrastructure to support the strong revenue growth.

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 now and the first thing they tend to cut back on is marketing.  

Zacks Industry Rank Indicates That Challenges Strong Prospects

The Zacks Electronic – Commerce Industry is a 28-stock group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rank #44, which places it at the bottom 17% 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 improving 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 expecting earnings to decline this year and the next. So the net decline in earnings estimate is 37.3% for 2020 and 29.8% for 2021 on revenue that’s currently expected to be down 1.0% in 2020 and up 1.6% 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 20.7% over the past year, while the Zacks S&P 500 Composite and Zacks Retail and Wholesale Sector have gained 3.95% and 17.5%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is a commonly used method of valuing electronics focused companies, we see that the industry is currently trading at 51.6X, much higher thano the S&P 500’s 21.1X and also above the sector’s forward-12-month P/E of 23.8X.

Over the past year, the industry has traded as high as 51.6X, as low as 36.2X and at the median of 40.1X, as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Bottom Line

The industry has compelling reasons to buy, as it is one of the beneficiaries of the pandemic. Moreover, change in customer behavior toward doing more shopping online is likely to be a lasting trend. This could increase operating costs in the near term, but has positive implications for future earnings.

Valuation appears rich given the many unknowns although the industry will fare better than most others in the current environment. Here are a few stocks in the industry with buy ratings (Zacks Ranks #1 and #2). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Health Insurance Innovations Inc. (BFYT): The Zacks Rank #1 stock is up 7.8% over the past year. The Zacks Consensus Estimate for the current-year EPS is up a penny in the last 60 days.

Price and Consensus: BFYT

 

Wayfair Inc. (W): The Zacks Rank #1 stock has gained 33.3% over the past year. The Zacks Consensus Estimate for the current-year loss is down $4.65 in the last 60 days

Price and Consensus: W    

 

eBay Inc. (EBAY): The Zacks Rank #2 stock has gained 17.1% over the past year. The Zacks Consensus Estimate for the current-year EPS is up 7 cents in the last 60 days.

Price and Consensus: EBAY                                              

 

Alibaba.com Inc. (BABA): The Zacks Rank #2 stock has gained 17.8% over the past year. The Zacks Consensus Estimate for the current-year EPS is down 16 cents in the last 60 days.

Price and Consensus: BABA

 

The Hottest Tech Mega-Trend of All                

Last year, it generated $24 billion in global revenues. By 2020, it’s predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce “the world’s first trillionaires,” but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks’ 3 Best Stocks to Play This Trend >>

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Wayfair Inc. (W) : Free Stock Analysis Report
 
JD.com, Inc. (JD) : Free Stock Analysis Report
 
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
 
Expedia Group, Inc. (EXPE) : Free Stock Analysis Report
 
eBay Inc. (EBAY) : Free Stock Analysis Report
 
Health Insurance Innovations, Inc. (BFYT) : Free Stock Analysis Report
 
Alibaba Group Holding Limited (BABA) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
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