5 Online Retail Stocks to Buy on the Dip

retail stocks - 5 Online Retail Stocks to Buy on the Dip

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You’ve probably heard by now. Thanks to U.S.-China trade progress, supportive central bank policy, and a strong third-quarter earnings season, the stock market has surged to record highs in late 2019. As of this writing, the S&P 500 is trading north of the 3,090 mark, and is up an impressive 4% over the past month alone.

One group of stocks that didn’t get an invite to this party? Online retail stocks. The Amplify Online Retail ETF (NASADQ:IBUY) is actually down over the past month, and presently trades about 10% off its 2019 highs.

Why the relative weakness in online retail stocks? A few things. Namely, there have been concerns that the 2019 holiday shopping season won’t be that strong, because of tariffs and falling consumer confidence. There have also been concerns about valuation on online retail stocks, and as yields have powered higher over the past few weeks, those valuation concerns have become more relevant.

But, U.S.-China trade tensions are easing, and consumer confidence metrics should rebound with the economic outlook now improving and labor markets still strong. Online retail stocks also now look about as cheap as many of them have ever been. Broadly, then, online retail stocks look attractively valued heading into what could be a big upward catalyst this holiday shopping season.

The investment implication? Buy the dip in online retail stocks.

With that in mind, let’s take a look at five online retail stocks that look particularly attractive amid recent weakness and ahead of the holiday shopping season.

Online Retail Stocks to Buy: Etsy (ETSY)

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% Off 52 Week Highs: 45%

Shares of online arts-and-crafts marketplace Etsy (NASDAQ:ETSY) plunged in late October after the specialty e-retailer reported mixed third-quarter numbers that included a lame fourth-quarter guide. Before the plunge, ETSY stock had already been trading weakly due to slowing growth concerns. Such concerns have only grown louder in the wake of the print.

Today, ETSY stock trades almost 50% off its one year highs.

But, this slowing growth narrative, which has driven the 50% plunge in ETSY stock is overstated. Growth is slowing because of noise related to the acquisition of Reverb, an online music gear marketplace which operates at lower margins and lower revenue take rates than Etsy. Naturally, as Etsy has integrated Reverb’s numbers into its own numbers, revenue take rates and margins have been adversely impacted. Importantly, volume growth rates have not slowed.

Over the next few quarters, though, Etsy will do everything it can to improve Reverb’s take rates and margins. They will be successful in doing so, because they did it at Etsy. As Reverb’s operating profile improves, so will Etsy’s overall operating profile, and ETSY stock will bounce back.

Amazon (AMZN)

Growth-Related Margin Compression Concerns Keeping Amazon Stock Sideways

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% Off 52 Week Highs: 13%

The king of e-commerce, Amazon (NASDAQ:AMZN), has seen its choke-hold over the online retail industry slip over the past few years.

Long story short, other retailers — namely, Walmart (NYSE:WMT) and Target (NYSE:TGT) — have caught up to Amazon on the e-commerce front. Now, Amazon’s competitive advantages in the online retail world are rapidly eroding and revenue growth rates have significantly decelerated. In response, Amazon is trying to regain competitive advantages, by rolling out things like free one day shipping. But, these initiatives have weighed on margins and have yet to boost top-line growth.

Ultimately, Amazon is stuck in a slowing growth, falling margin dynamic at present. This dynamic has plunged AMZN stock into correction territory, while the rest of the market is at all-time highs.

This dynamic will eventually reverse course. Free one-day shipping, at scale, will allow Amazon to regain some top-line momentum in 2020. At the same time, the lap will get easier (since it will factor in one day shipping costs), so margins will start to improve again in the back-half of 2020. This reversal to accelerating revenue growth and expanding margins will propel a rebound in AMZN stock.

Stitch Fix (SFIX)

Online Retail Stocks to Buy: Stitch Fix (SFIX)

Source: Stitch Fix

% Off 52 Week Highs: 35%

Profitability concerns have plagued online personal styling service Stitch Fix (NASDAQ:SFIX) for the past year. But, those profitability concerns could disappear in 2020, and as they do, SFIX stock could stage a big rebound.

Stitch Fix provides personalized styling services for consumers, taking the work out of shopping so that consumers don’t even have to shop to get new clothes. This convenience-first approach to shopping is interesting, and a lot of people are signing up for Stitch Fix. Revenue and client growth rates have been robust for several years. But, they are slowing somewhat, and this slowing is problematic because big investments in marketing and advertising are driving the growth. Thus, as revenue growth rates have come down, expense growth rates have not and margins have taken a big hit.

In fiscal 2019, adjusted EBITDA margins fell back 190 basis points. It’s no wonder SFIX stock presently trades 35% off its one-year highs.

In fiscal 2020, though, Stitch Fix’s margins could improve for two big reasons. First, revenue growth rates are expected to stabilize amid carry-over from strong marketing campaigns in 2019. Two, expense growth rates are expected to moderate as Stitch Fix optimizes its ad and marketing spend. The result? Adjusted EBITDA margins are expected to rise more than 200 basis points in fiscal 2020.

As Stitch Fix’s margins go from falling to rising, SFIX stock could similarly go from falling to rising.

eBay (EBAY)

Online Retail Stocks to Buy: eBay (EBAY)

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% Off 52 Week Highs: 16%

While the first half of calendar 2019 was great for e-commerce marketplace eBay (NASDAQ:EBAY), the second half hasn’t been so great. Fortunately, recent struggles won’t persist, and the first half of 2020 for EBAY stock should look a lot like the first half of 2019.

For most of 2019, eBay was firing on all cylinders. New growth initiatives were driving revenue trend improvements, while disciplined cost control and cutting were pushing margins higher. EBAY stock roared 45% higher year-to-date through July. Then, the bad news hit. Mostly, revenue trends decelerated, margins stopped pushing and eBay canned its Chief Executive Officer. The convergence of these headwinds has caused EBAY stock to drop 16% from its July highs.

These headwinds won’t last. The implementation of new internet sales taxes across a variety of states, which has disproportionately disadvantaged small sellers, is the real reason why eBay’s growth rates have slowed. Come 2020, these implementations will be in the rear-view mirror. Revenue growth rates will re-accelerate higher, which will allow for positive operating leverage to re-enter the picture.

Thus, in 2020, eBay should get back to its positive revenue growth, margin expansion growth narrative. As it does, EBAY stock should get back on a winning path.

Chewy (CHWY)

Online Retail Stocks to Buy: Chewy (CHWY)

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% Off 52 Week Highs: 38%

The bull thesis on leading U.S. pet e-retail marketplace Chewy (NYSE:CHWY) is pretty simple. This is a strong company, with great growth prospects. But, the market initially overvalued these growth prospects. After a brief valuation reset period, CHWY stock now looks ready to head higher, supported by what should be a strong holiday showing.

The fundamentals here are good. Americans love their pets more and more every generation it seems, and their appetite to spend money on their pets keeps going up and up. In this secular growth industry, pretty much all the sales happen in the physical channel, meaning there is a huge opportunity for e-retail expansion. Chewy is at the heart of that expansion, and could very reasonably turn into the Amazon of the pet care market within the next few years.

The problem with CHWY stock, at least initially, was that everyone knew Chewy was a good company, so the valuation became bloated. On its first day of trading, CHWY stock jumped 60% to $35. That price tag was unwarranted. So, shares have dropped ever since. Now, they sit squarely around $23.

Has this valuation reset period ended? I think so. According to my numbers, a $23 price tag for CHWY stock is sensible given its long-term growth prospects. At the same time, the holiday period should be really good for Chewy, because it seems that consumers this year are in a mood to spend big on pet gifts.

Ultimately, solid holiday numbers coupled with a more reasonable valuation should turn the sinking ship of CHWY stock around over the next few months.

As of this writing, Luke Lango was long ETSY, WMT, TGT, SFIX and EBAY.

Article printed from InvestorPlace Media, https://investorplace.com/2019/11/5-online-retail-stocks-to-buy-on-the-dip/.

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