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Electronic-Commerce Outlook: Growth Story at 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 (AMZN - Free Report) Echos, Alphabet (GOOGL - Free Report) Google Homes and Apple (AAPL - Free Report) HomePods are facilitating conversational commerce.

On the other side are the software platforms facilitating the transaction, which are getting AI-enabled and more sophisticated, and therefore, more capable of delivering a satisfying user experience. Social networks have started playing a bigger role today, with chatbots facilitating back end operations and customer care.

Differentiation in the business comes from better technology for 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, 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 and the stronger players to partner with Google to fill technology gaps.

Here are the three major themes in the industry:

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 industry players are all moving 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. Self-driven delivery vehicles and drones are already on the horizon to deal with logistics problems and make deliveries smoother and cheaper. 

Because of the many details involved in satisfying a customer, data mining has grown in importance and the party controlling the customer’s data is the best positioned to deliver 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.

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. However, margins are pressured by the need to build out infrastructure to support the strong revenue growth.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Electronic - Commerce Industry is a 24-stock group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rank #176, which places it at the bottom 31% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for 2019 has dropped 4.6%.

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 has mostly led the broader Zacks Retail and Wholesale Sector as well as the S&P 500 index over the past year although it hasn’t done as well in the last couple of months.

So we see that the stocks in this industry have collectively gained 5.6% over the past year, while the Zacks S&P 500 Composite and Zacks Retail and Wholesale Sector have rallied 2.2% and 6.9%, 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 37.1X compared to the S&P 500’s 16.2X. It is also above the sector’s forward-12-month P/E of 24.6X.

Over the past year, the industry has traded as high as 53.5X, as low as 34.4X and at the median of 43.3X, as the chart below shows.

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

 

Bottom Line

This is a place to avoid right now except for long-term plays, especially considering the rich valuation. This is seen in the relatively small number of buy-ranked stocks in the industry (Zacks Ranks #1 and #2). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

So while most of us would do better to avoid the industry, here are some stock picks for those with a longer investment horizon-

TripAdvisor, Inc. (TRIP - Free Report) : The Zacks Rank #1 stock has lost 84.3% over the past year. The Zacks Consensus Estimate for the current-year EPS dropped 19.3% in the last 60 days.

Price and Consensus: TRIP

 

Stamps.com Inc. (STMP - Free Report) : The Zacks Rank #2 stock has gained 1.8% over the past year. The Zacks Consensus Estimate for the current-year EPS is down 8.9% in the last 60 days and up 3.3% in the last 60 days.

Price and Consensus: STMP

 

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