This year is likely to be a good one for e-commerce, with the segment expected to take away big slices of the total retail pie. Commerce Department numbers for the last quarter is proof of this: e-commerce sales in the fourth quarter of 2023 grew 7.5% over 4Q22 (0.8% sequentially), with total retail sales increasing 2.8% (0.4% sequentially). E-commerce accounted for around 15.6% of total U.S. retail sales.
 
The convenience of online shopping remains the top reason for ecommerce volumes and this is particularly true of Gen-Z, which is, increasingly, the more relevant component of sales. Many of these buyers have grown up on the Internet and are accustomed to a high level of digitization. They are also likely to hang out on popular social media platforms, allowing themselves to be influenced by the latest trends there. This is driving an entirely new perspective on the e-commerce space, one that appears to be expanding with more advanced technology such as AR/VR, social commerce and the Metaverse.  
 
Valuation has improved over the past year, reflecting the significantly stronger growth prospects. Several stocks in this extremely diverse industry are worth buying today, but we’ve picked two: PDD Holdings and eBay.

About the Industry

This industry includes companies which operate as as an online and mobile commerce company like Alibaba Group Holding Limited (BABA).

Current Trends Driving the Internet-Commerce Industry

• The total retail experience between physical and digital continues to blur as most consumers blend their online and offline activities. This usually takes the forms of research online and buy in-store or buy online and pick up in-store. Since convenience is the main requirement, any experience that increases the speed of delivery/pickup is likely to be preferred. This may entail increased reliance on robots, self-driven delivery vehicles and drones that could ease bottlenecks and make deliveries smoother and cheaper. Therefore, it isn’t just the online-first retailers that are building a physical presence but also those that have traditionally been physical retailers that are digitizing to various degrees, or even getting themselves a digital store-front.

• Another notable trend is a subscription format for repeat-use items. This makes it easier for the consumer to order and for the retailer to plan. Retailers usually offer some kind of discount to consumers choosing this option, which makes it all the more attractive. The trend is expected to expand going forward as both tangible and intangible commodities and low-value and high-value items are increasingly sold ‘as-a-service.’

• Direct access to the consumer is something that no retailer can afford to pass up because this is the only way to acquire customer data. Since some of the larger companies are already providing services based on customer data (such as Amazon’s buyer review summary), buyers are getting used to these services. 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, drive sales and minimize returns. Artificial intelligence, as used by companies like Amazon, already decides how competitive a player is. So harnessing big data has become imperative for survival.

• The macroeconomic situation continues to evolve, although we can probably say with a certain amount of confidence that there won’t be a recession this year. On the other hand, rate cuts appear to be on the horizon, especially considering that elections are around the corner. Although today’s consumer is thrifty, the easing of pressure on their disposable incomes can only be a good thing. For producers, supply chain issues have alleviated to a great extent while the labor situation is still tight. Global uncertainties continue to affect foreign exchange effects for companies with international operations. At the same time, there are real chances of one or more rate cuts this year, which will ease the pressure on both producers and consumers, making this a positive for the industry this year (especially considering the back-half loaded sales it typically has. Overall, industry players will continue to see the benefits of operating leverage they have built up in the last few years. 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, and consumers continue to move back to the convenience of online shopping.

• A trend that Gen-Z is popularizing is social commerce. Social commerce means the ability to discover, research, buy and checkout on a social media platform, often and increasingly more so, through influencers. Brands usually have store fronts on these platforms where influencers also discuss their products, thus driving traffic to them. The social element of shopping that ecommerce had taken out is thus returning through this route. Since social commerce first became popular in China, it isn’t surprising that the Chinese social media platform TikTok that’s also very popular with Gen Z is the number one place for social commerce. But others like Facebook and Instagram are also very popular. According to The Future of Commerce, 96.9 million Americans shop directly on social media. Since 83% of the Gen Z start their shopping on social media, its clear where this trend is going. According to this report, social commerce will account for $2.9 trillion by 2026.

Zacks Industry Rank Indicates 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 23% of 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 positive near-term prospects.

E-commerce being in the top 50% of Zacks-ranked industries is the result of its relative performance versus others. What we’re seeing in the aggregate estimate revisions is significantly stronger sentiments, particularly from July. The aggregate earnings estimate for 2024 is up 37.1% and for 2025 up 24.4%. Given the rate cuts expected this year, things look set for a second half.

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

Over the past year, the Zacks Electronic - Commerce Industry has been traded at a significant premium to both the broader Retail and Wholesale sector and the S&P 500.

The stocks in this industry have collectively gained 50.1% over the past year, compared to the 29.2% gain for the broader Zacks Retail and Wholesale Sector and the 27.1% gain for the S&P 500.

One-Year Price Performance

Image Source: Zacks Investment Research

Current Valuation Attractive

On the price-to-forward 12 months’ earnings (P/E) basis, the industry trades at a 26.07X multiple, which is a discount to its median level of 27.14X over the past year, although still a premium to the S&P 500’s 21.2X and the broader retail sector’s 22.71X.

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

Image Source: Zacks Investment Research

2 Stocks Worth Considering

The improving prospects and attractive valuation indicate that there a number of stocks currently worth picking. Especially because of the significant variety that exists in this industry in terms of lines of business, business model, location and so forth.

PDD Holdings Inc. (PDD Quick QuotePDD - Free Report) : Based in Dublin, Ireland, PDD Holdings, formerly Pinduoduo (which was based in Shanghai, China until Mar 2023), owns and operates a portfolio of businesses. Its Pinduoduo e-commerce platform offers agricultural produce, apparel, shoes, bags, mother and childcare products, food and beverage, electronic appliances, furniture and household goods, cosmetics and other personal care, sports and fitness items, as well as auto accessories. Its Temu platform is an innovative online marketplace capitalizing on online ads, social media, coupon codes and games to attract and retain users.

Building on the strong demand and improving consumer sentiment it witnessed in the fourth quarter, the company is now focused on delivering high quality products and solutions by harnessing the latest technologies. PDD will be spending RMB10 billion in 2024, its second straight year of investment at this scale with an eye on technology enhancements and its core agricultural operations. Management believes this will improve customer experiences and build sticky communities with positive implications for both buyers and sellers.

In the last 30 days, analysts have raised PDD’s 2024 estimate by $1.29 (18%) and 2025 estimates by $1.75 (19.6%). Analysts currently expect the company to grow revenue and earnings by a respective 49.8% and 29.1% this year and another 35.3% and 25.8%, respectively, in the following year.

The shares of this Zacks Rank #1 (Strong Buy) company are up 65.3% over the past year.

Price & Consensus: PDD

Image Source: Zacks Investment Research

 

eBay Inc. (EBAY Quick QuoteEBAY - Free Report) : San Jose, California-based eBay operates an online marketplace platform connecting buyers and sellers in the U.S., UK, China and Germany. It also has a suite of mobile apps facilitating these operations.

eBay is taking steps to utilize AI, particularly generative AI to improve customer experience and boost results. Its multi-warehouse shipping optimization is helping sellers manage their businesses more efficiently while providing more reliable delivery timelines to customers. The company has also recently initiated restructuring actions that will reduce its workforce by a 1000. Management believes this will align costs to growth targets and drive profitability in the age of AI.

In the last 30 days, the Zacks Consensus Estimate for 2024 has increased 5 cents (around 1%). For 2025, it is up 08 cents Analysts expect earnings growth of 9.2% in 2024 and 7.5% in 2025.

The Zacks Rank #2 stock is up 20.1% over the past year.

Price & Consensus: EBAY

Image Source: Zacks Investment Research