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The need for social distancing is no longer a driver for the ecommerce segment, which includes pureplays as well as traditional retailers with ecommerce capabilities. Ecommerce continues to grow strongly off a relatively small base, but with the reopening, physical retail is growing faster. The race to digitization and consumer habits altering for good remain positive drivers of ecommerce and this is a secular trend, notwithstanding the normal increase in the holiday season and the impending recession in 2023.
Accordingly, ecommerce sales in the second quarter were 6.8% above 2Q21 (up 2.7% sequentially), with total retail sales increasing 10.9% (up 3.7% sequentially). Ecommerce accounted for around 14.5% of total U.S. retail sales. Based on estimates from the Commerce Department, it’s apparent that ecommerce growth rates are impacted by traffic that continues to move back to stores following the pandemic, making for difficult comps.
Valuation is still short of reflecting the relatively weaker prospects next year. But there are a number of international players that look attractive. We’ve picked CPNG, JD and JMIA.
About the Industry
Internet - 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. as well as more shipping options, which generally tip the scales in favor of larger players. Particularly because there is fierce price competition necessitating deep discounting, which keeps prices down.
Many new players are emerging in a market that is still dominated by Amazon.
Current Trends Driving the Internet-Commerce Industry
Holiday shopping is the biggest near-term driver for the industry. Deloitte expects a 12.8-14.3% increase in ecommerce sales in the 2022-23 holiday season, which is still well ahead of the 4-6% increase it expects in overall retail sales. This estimate is far more optimistic than Saleforce’s, which counts November and December as the holiday season, and according to which, ecommerce sales will be essentially flat from last year but up 55% globally and 61% in the U.S. compared to 2019 levels. Both firms think that the holiday season will begin early, spurred by loyalty and other promos by retailers. Black Friday and Cyber Monday continue to merge into Cyber month even as consumers turn relatively cautious. Last year, everyone was flush with free money and the spoils from a strong stock market. They were also looking to socialize after many months of being shut down. This year, they are still comfortable moneywise considering the full employment situation, but there are increasing concerns about a recession and impending job losses. Therefore, people are likely to welcome promos, discounts and deals. NFTs are likely to become popular gifts this season, especially among the Gen Z. Salesforce is concerned about the hit to profits that will be the natural consequence of prevailing inflationary conditions. Also, it estimates that the flattish sales in dollar terms works out to a 5% reduction in the volume of goods transacted given that all items are costlier this year (up 7% from 2021 and 15% from 2020).
The industry is seeing difficult comps as markets continue to open up after the pandemic-driven surge in digital sales over the last couple of years. While purchasing trends haven’t reversed entirely, the effect of more sales moving back to stores was only to be expected. Rising inflation, followed by rate hikes and an impending recession are also not the greatest thing to happen to retailers. The supply chain and labor issues that started the crisis in the first place continue to drive up costs. Nobody really knows for sure when these issues will be resolved. Additionally, retailers have hugely bult up their digital infrastructure in order to deal with the surging demand, and idling this will add to costs. On a positive note, the importance of having a digital presence has never been greater, particularly considering the fact that the retail ecommerce market continues to expand into new product segments and geographies.
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. A number of foreign companies also make good investments. Accordingly, global retail ecommerce grew around 16% in 2021. In 2022, most of the strength is expected to come from the Philippines, India, Indonesia and Brazil growing the fastest, by at least 22%. Total retail sales growth is expected to go from +9.7% in 2021 to +5.0% in 2022. Ecommerce will grow its share of total global retail sales from an estimated 21% this year to 24.5% by 2025. The top five ecommerce markets are China, U.S., UK, Japan and South Korea. Amazon’s share of U.S. ecommerce (expected to grow 16.1% this year according to Insider Intelligence) is around 40%, and the leading retailer is expected to grow 15.3% this year. Traditional retailers’ focus on digital initiatives including click and collect, cashierless checkout, contactless payment and digital signage should continue, despite customers returning to stores. Online retailers’ focus remains on social commerce, grocery sales and the buy-now-pay-later option.
Both ecommerce pureplays and traditional retailers are balancing ecommerce sales with a physical presence because it is only proximity to a consumer that can facilitate quick delivery. Therefore, a hybrid/omnichannel model has become commonplace, allowing customized, quick and convenient delivery (BOPIS, curbside pickup) through apps. Customers generally downgrade stores that don’t provide these conveniences. 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.
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 relatively strong near-term prospects.
The industry’s positioning in the top 50% of the Zacks-ranked industries is the result of its relative performance versus others. What we’re seeing in the aggregate estimate revisions is significantly weaker earnings than a year ago, as a fallout of the difficult comps. However, expectations for both 2022 and 2023 seem to have improved since July, which seems to be driving the positive industry rank.
As things stand now, the aggregate earnings estimate for 2022 is down 44.1% and for 2023 is down 44.2%. Profitability is taking a hit because a lot of the sales that moved online because of the pandemic continues to move back to stores. Supply chain and labor issues are also increasing the cost of operation while amortization and other charges ride higher on the increased infrastructure buildup over the past few years. Expectations of a recession next year are leading to further deterioration in the outlook.
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 has traded at a discount to both the broader Zacks Retail and Wholesale Sector as well as the S&P 500 index over the past year.
Therefore, we see that the stocks in this industry have collectively lost 43.0% of their value over the past year, compared to the broader Zacks Retail and Wholesale Sector, which lost 34.8% and the S&P 500, which lost just 19.0%.
Industry's Current Valuation
On the price-to-forward 12 months’ earnings (P/E) basis, the industry still looks grossly overvalued (31.95X) with respect to both the S&P 500 (14.92X) and the broader retail sector (15.65X).
On the basis of forward sales for the year (P/S) however, the industry trades at its annual low of 1.36X, which trails the sector’s 2.96X (also an annual low) as well as the S&P 500’s 3.25X (also lowest point over the past year). Over the past year, the industry has traded as high as 2.53X, as low as 1.36X and at the median of 1.71X.
3 Stocks Worth Considering
While things don’t look exciting for the industry overall and its valuation is still too expensive, there are quite a large number of stocks to choose from. That’s because of the significant variety that exists in this industry in terms of lines of business, business model, location, and so forth. Here are a few that are worth buying today:
Coupang, Inc.: Through its websites and mobile apps, Seoul, South Korea-based Coupang sells various products in the home and décor, apparel, beauty, fresh food and groceries, sporting goods, electronics, and everyday consumables categories, as well as travel, and restaurant order and delivery services primarily in South Korea. Its operations and support services are rendered in China, Singapore, Japan, Taiwan, and the U.S.
Operating in one of the top five ecommerce markets, the company has grown its revenues very strongly in the last two years. While revenue growth has flatlined in the first two quarters, analyst estimates for both 2022 and 2023 continue to call for double-digit growth. Its estimates are also moving up. For 2022, the loss estimate of 41 cents 90 days ago have moved up to a loss of 20 cents right now. The 2023 loss estimate of 12 cents has gone up to a profit of 11 cents.
The Zacks Rank #1 (Strong Buy) company’s shares are down 41.9% year to date.
JD.com, Inc.: Through its online marketplaces, Beijing (PRC)-based JD.com sells computing, communication and consumer electronics products. It also sells home appliances, furniture and household goods, food, beverage and fresh produce, baby and maternity products, cosmetics and other personal care items, pharmaceutical and healthcare products, books, automobile accessories, apparel and footwear, bags, and jewelry.
The resurgence of the pandemic and China’s zero tolerance policy have wreaked havoc on its growth in recent quarters and the ecommerce segment is no different. However, JD with its broad product range, sprawling network of marketplaces, robust supply chain (the logistics business turned profitable last quarter) and huge customer base is better equipped than many to deal with the situation. As such, it is one of the safer stocks in the segment and should come back strongly once the pandemic recedes.
Analysts are extremely positive about JD’s prospects. They are expecting strong double-digit earnings growth for 2022 and 2023. The 2022 estimate has increased 32 cents (17.2%) in the last 90 days. The 2023 estimate has increased 7 cents (2.7%).
The Zacks Rank #1 stock is down 38.5% year to date.
Jumia Technologies AG: Berlin, Germany-headquartered Jumia Technologies is an ecommerce marketplace operating mainly in Africa, UAE and also Europe. It is the leading ecommerce platform in Africa selling apparel, accessories, beauty and personal care products, home and living, fast moving consumer goods, smartphones and other electronics. It also provides logistics, payments and other services, including restaurant food delivery, airtime recharge and utility bill payment.
Most of the optimism on the stock stems from the 43% increase in revenue and 35% increase in orders in the last quarter, as beauty and cleaning products did particularly well. The quarterly active customers also increased 25% to 3.4 million. Management said that the worst of the losses were behind it and the way forward included cost cutting, marketing and promotions, which is probably why capex was lowered substantially.
This Zacks Rank #2 stock’s loss estimates for 2022 and 2023 continue to be lowered while revenue growth projections remain in the double-digits for both years. The 2022 loss per share is down from $2.83 to $2.53. The 2023 loss is down from $2.49 to $2.13.
The shares are down 55.2% year to date.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Coupang, JD.com, Jumia Technologies and Amazon
For Immediate Release
Chicago, IL – October 17, 2022 – Today, Zacks Equity Research discusses Coupang, Inc. (CPNG - Free Report) , JD.com, Inc. (JD - Free Report) , Jumia Technologies AG (JMIA - Free Report) and Amazon (AMZN - Free Report) .
Industry: E-commerce
Link: https://www.zacks.com/commentary/1992368/3-ecommerce-picks-as-industry-gears-up-for-holiday-season
The need for social distancing is no longer a driver for the ecommerce segment, which includes pureplays as well as traditional retailers with ecommerce capabilities. Ecommerce continues to grow strongly off a relatively small base, but with the reopening, physical retail is growing faster. The race to digitization and consumer habits altering for good remain positive drivers of ecommerce and this is a secular trend, notwithstanding the normal increase in the holiday season and the impending recession in 2023.
Accordingly, ecommerce sales in the second quarter were 6.8% above 2Q21 (up 2.7% sequentially), with total retail sales increasing 10.9% (up 3.7% sequentially). Ecommerce accounted for around 14.5% of total U.S. retail sales. Based on estimates from the Commerce Department, it’s apparent that ecommerce growth rates are impacted by traffic that continues to move back to stores following the pandemic, making for difficult comps.
Valuation is still short of reflecting the relatively weaker prospects next year. But there are a number of international players that look attractive. We’ve picked CPNG, JD and JMIA.
About the Industry
Internet - 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. as well as more shipping options, which generally tip the scales in favor of larger players. Particularly because there is fierce price competition necessitating deep discounting, which keeps prices down.
Many new players are emerging in a market that is still dominated by Amazon.
Current Trends Driving the Internet-Commerce Industry
Zacks Industry Rank Reflects Holiday Strength
The Zacks Internet - Commerce Industry is a rather large group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rank of #59, which places it in the top 24% 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 relatively strong near-term prospects.
The industry’s positioning in the top 50% of the Zacks-ranked industries is the result of its relative performance versus others. What we’re seeing in the aggregate estimate revisions is significantly weaker earnings than a year ago, as a fallout of the difficult comps. However, expectations for both 2022 and 2023 seem to have improved since July, which seems to be driving the positive industry rank.
As things stand now, the aggregate earnings estimate for 2022 is down 44.1% and for 2023 is down 44.2%. Profitability is taking a hit because a lot of the sales that moved online because of the pandemic continues to move back to stores. Supply chain and labor issues are also increasing the cost of operation while amortization and other charges ride higher on the increased infrastructure buildup over the past few years. Expectations of a recession next year are leading to further deterioration in the outlook.
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 has traded at a discount to both the broader Zacks Retail and Wholesale Sector as well as the S&P 500 index over the past year.
Therefore, we see that the stocks in this industry have collectively lost 43.0% of their value over the past year, compared to the broader Zacks Retail and Wholesale Sector, which lost 34.8% and the S&P 500, which lost just 19.0%.
Industry's Current Valuation
On the price-to-forward 12 months’ earnings (P/E) basis, the industry still looks grossly overvalued (31.95X) with respect to both the S&P 500 (14.92X) and the broader retail sector (15.65X).
On the basis of forward sales for the year (P/S) however, the industry trades at its annual low of 1.36X, which trails the sector’s 2.96X (also an annual low) as well as the S&P 500’s 3.25X (also lowest point over the past year). Over the past year, the industry has traded as high as 2.53X, as low as 1.36X and at the median of 1.71X.
3 Stocks Worth Considering
While things don’t look exciting for the industry overall and its valuation is still too expensive, there are quite a large number of stocks to choose from. That’s because of the significant variety that exists in this industry in terms of lines of business, business model, location, and so forth. Here are a few that are worth buying today:
Coupang, Inc.: Through its websites and mobile apps, Seoul, South Korea-based Coupang sells various products in the home and décor, apparel, beauty, fresh food and groceries, sporting goods, electronics, and everyday consumables categories, as well as travel, and restaurant order and delivery services primarily in South Korea. Its operations and support services are rendered in China, Singapore, Japan, Taiwan, and the U.S.
Operating in one of the top five ecommerce markets, the company has grown its revenues very strongly in the last two years. While revenue growth has flatlined in the first two quarters, analyst estimates for both 2022 and 2023 continue to call for double-digit growth. Its estimates are also moving up. For 2022, the loss estimate of 41 cents 90 days ago have moved up to a loss of 20 cents right now. The 2023 loss estimate of 12 cents has gone up to a profit of 11 cents.
The Zacks Rank #1 (Strong Buy) company’s shares are down 41.9% year to date.
JD.com, Inc.: Through its online marketplaces, Beijing (PRC)-based JD.com sells computing, communication and consumer electronics products. It also sells home appliances, furniture and household goods, food, beverage and fresh produce, baby and maternity products, cosmetics and other personal care items, pharmaceutical and healthcare products, books, automobile accessories, apparel and footwear, bags, and jewelry.
The resurgence of the pandemic and China’s zero tolerance policy have wreaked havoc on its growth in recent quarters and the ecommerce segment is no different. However, JD with its broad product range, sprawling network of marketplaces, robust supply chain (the logistics business turned profitable last quarter) and huge customer base is better equipped than many to deal with the situation. As such, it is one of the safer stocks in the segment and should come back strongly once the pandemic recedes.
Analysts are extremely positive about JD’s prospects. They are expecting strong double-digit earnings growth for 2022 and 2023. The 2022 estimate has increased 32 cents (17.2%) in the last 90 days. The 2023 estimate has increased 7 cents (2.7%).
The Zacks Rank #1 stock is down 38.5% year to date.
Jumia Technologies AG: Berlin, Germany-headquartered Jumia Technologies is an ecommerce marketplace operating mainly in Africa, UAE and also Europe. It is the leading ecommerce platform in Africa selling apparel, accessories, beauty and personal care products, home and living, fast moving consumer goods, smartphones and other electronics. It also provides logistics, payments and other services, including restaurant food delivery, airtime recharge and utility bill payment.
Most of the optimism on the stock stems from the 43% increase in revenue and 35% increase in orders in the last quarter, as beauty and cleaning products did particularly well. The quarterly active customers also increased 25% to 3.4 million. Management said that the worst of the losses were behind it and the way forward included cost cutting, marketing and promotions, which is probably why capex was lowered substantially.
This Zacks Rank #2 stock’s loss estimates for 2022 and 2023 continue to be lowered while revenue growth projections remain in the double-digits for both years. The 2022 loss per share is down from $2.83 to $2.53. The 2023 loss is down from $2.49 to $2.13.
The shares are down 55.2% year to date.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.