Online retail stocks have been on fire in 2020.
As the novel coronavirus pandemic shut down the physical economy throughout March, April and May — and as civil unrest across the U.S. has forced many retailers to shut down stores just as they were reopening in June — consumers have pivoted en masse to online retail channels to do their shopping.
Online retail sales in the U.S. rose more than 20% year-over-year in April.
This has caused online retail stocks to breakout in a big way in 2020. Year-to-date, the Amplify Online Retail ETF (NASDAQ:IBUY) is up a jaw-dropping 30%, compared to a 5% drop for the S&P 500 and a near 10% drop for the SPDR S&P Retail ETF (NYSEARCA:XRT), which is heavily weighted to physical retail stocks.
This robust out-performance should persist. After all, the consumer shift towards e-commerce is a secular trend. It was here long before Covid-19 and civil unrest arrived, and will stick around long after those crises leave, too. Amid broader e-commerce adoption tailwinds, online retail stocks will broadly outperform.
But don’t treat all online retail stocks equally. Some will rally much more than others. And some will even falter here on the heels of an enormous rally.
To know the difference, let’s take a deeper look at 15 red-hot online retail stocks soaring high in 2020:
- Wayfair (NYSE:W)
- Etsy (NASDAQ:ETSY)
- Overstock.com (NASDAQ:OSTK)
- Amazon (NASDAQ:AMZN)
- Chewy (NYSE:CHWY)
- Revolve (NYSE:RVLV)
- eBay (NASDAQ:EBAY)
- Blue Apron (NYSE:APRN)
- MercadoLibre (NASDAQ:MELI)
- JD.com (NASDAQ:JD)
- Carvana (NYSE:CVNA)
- Tesla (NASDAQ:TSLA)
- Farfetch (NYSE:FTCH)
- Stitch Fix (NASDAQ:SFIX)
- PayPal (NASDAQ:PYPL)
Year-to-Date Performance: +104.9%
Wayfair stock has been on an absolute tear this year, more than doubling through the first five months of 2020 as the online home furniture retailer reported blockbuster results amid the coronavirus pandemic.
In its first quarter earnings report, Wayfair reported the second quarter sales growth was up by approximately 90%, and that increased scale was driving enormously positive operating leverage. Management guided for gross margins to rise to 26%, compared to 24% in the year ago quarter. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins are expected to be positive, versus a loss margin of 3% in the year ago quarter.
All of that is good news. But the better news is that the core fundamentals here — Wayfair is a leader in the under-penetrated but quickly expanding e-furniture market, with rapidly improving profit margins, and significant long-term profit growth potential — are rock solid.
As such, I don’t think this rally in Wayfair stock is overdone. Instead, I think this red-hot online retail stock can keep rallying.
Year-to-Date Performance: +82.2%
Amid a surge in online sales, Etsy stock has rallied more than 80% in 2020, supported largely by:
- Over 100% growth for Etsy Marketplace in the month of April;
- Surging web traffic trends;
- Surging search interest trends; and
- Surging app download volume.
Although this rally has been impressive — and Etsy was one of my favorite stocks coming into the year — I think now is the time to pull back on the bullishness.
The valuation is extremely rich (12-times trailing sales, double the five-year-average sales multiple of 6, per YCharts). E-commerce tailwinds could taper back off over the next few months as the physical economy reopens. And the stock has come very far, very fast.
As such, I wouldn’t chase this rally. Instead, I’d monitor the stock, wait for a big dip and then buy said dip.
Year-to-Date Performance: +195.5%
One of the hottest online retail stocks of 2020 has been Overstock.com. Shares of the once left-for-dead home goods online retailer have almost tripled year-to-date amid a surge in online sales trends.
And believe it or not, this rally still has a lot firepower left.
Overstock.com is presently one of the market’s best turnaround stories. Not only are we in the midst of a watershed moment for e-commerce — wherein the online selling revolution permanently accelerates — but amid this massive transformation, Overstock.com is dramatically improving itself.
The company got a new CEO and improved the platform’s search relevancy. Overstock.com also enhanced the mobile web experience, expanded the content available on the site, leveraged data to improve pricing strategies, optimized logistics for shorter delivery times, and introduced free shipping on everything.
And it’s worked wonderfully. Traffic, sales, margin and profit trends are all accelerating like never before.
Because this stock was so beaten-up, in an everything-goes-right scenario, we could be looking at $100 prices for OSTK stock in the future.
Year-to-Date Performance: +33.6%
Of course, no list of red-hot online retail stocks would be complete without Amazon.
The e-commerce behemoth owns about half of the U.S. e-commerce market and has naturally benefited in a big way from online retail tailwinds in early 2020. First quarter net sales rose 27% year-over-year — one of the company’s best growth rates in several years.
But Amazon is much more than just an e-commerce behemoth.
It’s a cloud behemoth too, and demand for cloud infrastructure is surging amid accelerating enterprise digital transformations. And it has arms in the video game sector via streaming platform Twitch, which has seen surging demand amid broad stay-at-home orders.
In other words, Amazon is a company built for the digital world, from online retail to cloud to video games, and much more besides.
As such, I wouldn’t bet against this long-term winner. AMZN stock will encounter turbulence from time to time. But this stock’s flight trajectory will keep carrying shares higher.
Year-to-Date Performance: +68.5%
Thanks to consumers rushing to e-commerce, online pet food and supplies retailer Chewy has been on fire in early 2020. Not only did fourth quarter sales rise 35%, but management is also guiding for first quarter sales growth of nearly 40%.
This acceleration is not temporary.
Americans love their pets. This has never been more true than today, with Generation Z and millennial couples — who are notably pushing back big life events like having actual kids — becoming pet parents at greater frequency and treating those pets as starter children.
As such, U.S. consumer spend on all things pet-related (food, supplies, vets, etcetera) is enormous (projected at $99 billion in 2020) and growing at a steady 3%+ clip.
This massive and growing market is being hugely disrupted by e-retail. Today, only only 18% of pet food and supplies sales happen in the digital channel, versus north of 30% digital penetration for apparel sales. That number is expected to surge towards 25% within the next few years, implying explosive gains for the U.S. pet e-retail market going forward.
Chewy is at the epicenter of that market, with about 50% market share in 2019.
Having said all that, the valuation on CHWY stock is very extended, at over 4-times trailing sales. So rather than chasing this rally, wait for the next dip to buy.
Year-to-Date Performance: -8.8%
Next-generation fashion platform Revolve has a unique quality which sets it apart from the other online retail stocks on this list: RVLV stock is actually down year-to-date.
While that may seem like a bad thing, it’s actually a good thing. The relative under-performance in RVLV stock over the past six months paves the path for relative out-performance over the next six months.
At its core, Revolve is a modern online fashion apparel platform built to meet the wants, demands and needs of young consumers. It’s online- and mobile-focused. It’s built on the back of Instagram, and leverages influencers and trendy events to drum up brand awareness, equity and demand. And it relies heavily on social and purchase data to create trend-forecasting algorithms that help the company always maintain an “en vogue” apparel portfolio.
The company hit snags in its growth narrative in late 2019 for various reasons. But in 2020, thanks to the acceleration of e-commerce and social commerce (pay attention to Facebook‘s (NASDAQ:FB) new Shops initiative), Revolve is attractively positioned to re-accelerate its growth narrative in the back-half of 2020.
This re-acceleration will power RVLV stock higher.
Year-to-Date Performance: +36.1%
eBay has long been the slow growth eyesore in an otherwise hyper-growth online retail industry. However that all changed in 2020 as the coronavirus pandemic swept across the globe.
Of course, the second quarter of 2020’s 15% revenue growth rate isn’t going to sustain. Over the next few months, the physical economy will re-open, and that growth rate will come down.
But it won’t go back to zero.
Covid-19 permanently accelerated the online shopping megatrend by forcing consumers out of physical stores and onto online platforms. Many of those consumers will stick around for the convenience. And at the same time, management is cutting back on spending and doubling down on share repurchases.
In this sense, eBay isn’t returning to a zero growth world. The company’s “new normal” will be low single-digit revenue growth and bigger profit growth. That seems like a good growth profile given EBAY stock’s 16-times forward earnings multiple.
As such, this rally in EBAY will likely persist.
Blue Apron (APRN)
Year-to-Date Performance: +59.6%
One of Wall Street’s favorite online retail stocks during the Covid-19 pandemic has been that of struggling meal-kit maker Blue Apron.
Year-to-date, APRN stock has exploded higher by 60% as restaurant closures and some consumer fears around grocery shopping have pushed Americans onto online grocery delivery platforms, of which Blue Apron is a reasonable pure play.
Indeed, Blue Apron is seeing an unprecedented surge in demand amid this pandemic.
This demand surge will, of course, abate once Covid-19 hysteria dies down and the physical economy (including restaurants) reopens. However, Blue Apron should be able to turn this huge growth spike into enhanced word-of-mouth marketing, which should help stimulate a return to gradual and sustainable growth for the meal kit maker over the next few years.
If so, Blue Apron is so cheap (the market cap is just $150 million) that even mild growth over the next few years will spark huge gains for APRN stock.
Year-to-Date Performance: +53.7%
The “Amazon of Latin America,” MercadoLibre has had a strong showing in 2020, with MELI stock up more than 50% year-to-date on the back of record high growth in April.
Long-term, MercadoLibre has a bright future. The company operates Latin America’s largest e-commerce platform and digital payments ecosystem, a region that is both rapidly urbanizing and rapidly digitizing. That implies huge growth potential for MercadoLibre’s internet businesses over the next few years.
But in the near-term, MELI stock is both overvalued and overbought.
The stock has come very far, very fast, rallying about 90% in under three months, and shares trade at a jaw-dropping 17-times trailing sales. The five-year-average trailing sales multiple on MELI stock is about 11.
As such, I’d let this rally cool off before buying into this long-term winner.
Year-to-Date Performance: +70.7%
Looking at a different continent, JD.com is often considered the “Amazon of China.” Unsurprisingly, JD.com has seen its share price explode higher by more than 70% in 2020 on the back of accelerating e-commerce adoption throughout its home country.
That 70% jump is just an extension of a much bigger rally in JD stock. Since early 2019, shares are up nearly 200%.
Much like MELI stock, though, JD stock is a long-term winner that’s maxed out in the near-term.
In the long run, JD stock will grind higher thanks to strong e-commerce adoption tailwinds in China, the company’s dominant positioning in that hyper-growth market and economies of scale driving meaningful margin expansion.
But at $60 in mid-2020, JD stock is also fully priced for that reality, and further upside in the near-term will be limited by valuation friction.
Year-to-Date Performance: +31.6%
One of the more promising online retail stocks on this list is online used car retailer Carvana.
Up 32% year-to-date, CVNA stock is presently flying high on the idea that Covid-19 has finally pushed consumers to being more open to shopping for cars online. It has. But it won’t stop there.
The future of car buying is online, both because the status quo of brick-and-mortar car buying sucks (more than 80% of consumers dislike it) and because the online retail model is far superior. Superior in terms of optimizing consumer convenience, enabling a more seamless experience, truncating sales times and just generally making the entire process simpler and quicker.
Carvana could be called the Amazon of the used car market. And as the Amazon of the used car market, the company will boom alongside the burgeoning online used car market over the next decade, relying on superior brand equity, a broader distribution network and a larger used car inventory selection to sustain market leadership.
Against that backdrop, Carvana’s sales will keep soaring. Margins will improve with economies of scale. Today’s losses will turn into huge profits. And CVNA stock will push higher.
Year-to-Date Performance: +142.3%
One of the bolder decisions premium electric vehicle maker Tesla has made over the past few years was to shutter its physical stores and sell its cars exclusively online.
That bold decision appears to be paying off. Thanks to Covid-19, consumers are getting more comfortable with the idea of buying cars online. And while many auto dealerships are trying to play catch-up here, Tesla is, per usual, miles ahead of the rest of the industry.
Tesla’s leading online sales platform is just one of many advantages this automobile maker will rely on to drive enormous growth over the next few years, and one of the many reasons to buy and hold TSLA stock.
Sure, this stock is on fire right now. It just eclipsed the $1,000 marker for the first time. The market cap is rapidly approaching $200 billion, putting the company in rare air. Chasing this rally might be unwise.
But don’t be afraid to buy the next dip. For the foreseeable future, TSLA stock is a “buy every single dip” type of stock.
Year-to-Date Performance: +51.1%
One of the lesser known companies in the online retail world, luxury fashion e-retailer Farfetch has nonetheless been a huge beneficiary of Covid-19 related tailwinds.
To that end, FTCH stock is up more than 50% year-to-date.
This 2020 rally in FTCH is simply the beginning of a much bigger, much longer rally in the stock, one that will see Farfetch turn into the Amazon of the global luxury fashion retail world.
The bull thesis is pretty simple.
The luxury fashion retail world is quite big, with $300+ billion in sales. It’s supported by steady demand, as sales have risen at a 5% compounded annual growth rate since 2008. And it’s in desperate need of consolidation and digitization, because the industry has multiple brands, no centralized platform for customers to access all those brands and limited e-retail penetration at just 12% (versus 30%+ for the broader apparel category).
Farfetch — as the number one global in-season luxury fashion online marketplace, with 1,200+ luxury sellers and 2.1+ million active consumers — is best positioned to deliver the digital makeover that the luxury fashion industry so desperately needs.
If the company successfully executes against this opportunity, the stock will soar. Mostly because the market cap today sits at just $5 billion… and the addressable market here is north of $300 billion.
Stitch Fix (SFIX)
Year-to-Date Performance: -4.0%
Although Stitch Fix has exposure to the online retail world (which is up big in 2020), the online personalized styling service also has exposure to the apparel world (which is down big in 2020).
Net net, SFIX stock is down slightly on the year. But don’t fret; this won’t last long.
Stitch Fix represents the future of apparel shopping. The platform leverages data and personalization to give consumers a superior apparel shopping experience which reduces hassle by recommending relevant clothes, cuts time by putting all those recommendations in one place and improves outcomes by matching customers with the clothes that fit and look best for them.
Sure, the service is expensive, and therefore not for everyone. But for those who can afford it, Stitch Fix offers consumers an ideal way to shop in the 21st Century.
As such, this company will continue on a robust growth trajectory for the next few years and SFIX stock will stay on its current uptrend.
Year-to-Date Performance: +47.5%
Last but not least on this list of red-hot online retail stocks is digital payments company PayPal.
Against the backdrop of surging e-commerce sales, PayPal has seen sales through its digital payments platform soar over the past few months, paving the way for PYPL stock to gain nearly 50% in 2020.
But, while PYPL stock is undeniably a long-term winner, it may run into some near-term valuation friction.
Today, the stock is as richly valued as it’s ever been, across any and every major valuation multiple. The trailing sales multiple is above 10, a record-high and about double the stock’s historically-average sales multiple. The forward earnings multiple is near 50, also a record-high and more than 50% above the stock’s historically-average earnings multiple. Same is true for the trailing earnings multiple, the book multiple and the EBITDA multiple.
I understand that growth stocks can sustain long periods of extended valuation, so long as the news flow surrounding the company remains overwhelmingly positive. And that’s exactly what you have with PayPal today.
But that news flow still stop being so positive soon.
Covid-19 hysteria is moderating. The physical economy is reopening. As restaurants, shops and theaters reopen over the next few months, e-commerce growth rates will moderate. So will digital payment growth rates. And PayPal’s record high growth rates today will eventually fall.
Against that backdrop, valuation will be a problem. And PYPL stock could give back some gains.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AMZN, JD, SFIX and FB.