The novel coronavirus pandemic is likely to have a long-lasting impact on several industries. One of the industries that has benefited is global e-commerce and related e-commerce stocks. As social distancing and avoiding crowded places becomes a norm, individuals are increasingly using the online platform for shopping.
To put things into perspective, for the first half of fiscal year 2020, online sales in the U.S. increased by 30.1% on a year-on-year basis. In FY 2019, the comparable period sales growth was just 12.7%.
Not just in the U.S., the growth trend is similar globally. Between the current year and FY 2027, the global e-commerce market is expected to grow at a CAGR of 14.7%. Further, the e-commerce share of total global retail sales is likely to increase from 16.1% in the current year to 22% in FY2023.
Considering these factors, it’s a good time to remain invested in quality e-commerce stocks. This column will discuss four hot stocks to buy that will benefit from sustained e-commerce growth.
Let’s look at the following names:
E-Commerce Stocks: JD.com (JD)
JD stock is among the top hot stocks to buy in the e-commerce space even after an upside of 145% in the last year.
The most important reason is that analysts expect the company’s annual earnings growth at 49.7% over the next five years. Furthermore, the pandemic has accelerated e-commerce growth and I would not be surprised if earnings beat analyst estimates.
Of course, Alibaba (NYSE:BABA) is also an attractive e-commerce bet. However, I like JD.com because of the company’s strong growth coupled with a robust logistics network. The company has over 750 warehouses with geographic coverage in almost all counties and districts in China.
A strong logistics support allows JD.com to expand to lower tier cities in China at a faster pace as compared to peers. BABA stock, on the other hand, is among the hot stocks to buy for investors bullish on the cloud computing business.
Coming back to JD.com, higher operating leverage has also helps in margin improvement. As strong growth sustains, operating level margins will continue to improve. This will translate into higher free-cash flows. JD.com already has a robust FCF and that enables the company to pursue aggressive organic and inorganic growth.
SHOP stock has already been a hot stock in the e-commerce business. The stock has delivered stellar returns of 165% in the last year. Amid some profit booking, I expect the long-term rally in SHOP stock to sustain.
With the Covid-19 pandemic, sellers are increasingly turning online. This has fueled growth for Shopify. The company reported robust revenue growth of 97% for the second quarter of 2020. With a global presence, the total addressable market is significant.
Further, the company has witnessed sustained growth in revenue from subscription solutions. As online business grows, customers will shift from basic to advanced plans. Therefore, existing customers will trigger cash flow upside. The company’s total combined revenue of all previous cohorts has grown consistently. This makes the business model exciting for the long-term as online sellers swell globally.
I must mention here that Etsy (NASDAQ:ETSY) has also seen strong growth in the recent past. The company also connects buyers and sellers globally. However, I would prefer to invest in SHOP stock as I believe that the company has a better long-term FCF visibility.
Amazon needs no introduction in the e-commerce space and AMZN stock has been a value creator over the years. I remain bullish on Amazon for steady growth in the e-commerce business and robust growth in the cloud business.
Recently, it was reported that Reliance Industries is in talks with Amazon for a $20 billion stake sale in its retail arm. I am bullish on this potential investment as it gives Amazon a bigger inroad in India’s market, which has big potential.
In the United States, Amazon increased grocery delivery capacity by “by over 160% and tripled grocery pickup locations to support customers during COVID-19.” Online grocery sales tripled in Q2 2020 as compared to Q2 2019. Clearly, this is another growth area for Amazon in the coming years not just in the U.S., but also in other parts of the world.
Besides being a hot e-commerce stock to buy, I also like AMZN stock because of the company’s FCF. For the last 12 months, the company has delivered FCF of $21.3 billion. This gives the company financial flexibility for shareholder value creation and for pursuing aggressive growth.
Overall, AMZN stock is a core portfolio name with a healthy earnings growth outlook and cash flow upside visibility.
Among relatively smaller names, I would consider PDD stock in the list of hot stocks to buy in the e-commerce business. PDD stock has skyrocketed by 132% in the last six months and there are reasons to remain bullish on the stock.
The first reason to like Pinduoduo is the company’s strong top-line growth. For Q2 2020, the company delivered revenue growth of 67% on a year-over-year basis. With steady growth in active buyers and annual spending per active buyer, I expect strong growth to sustain.
The second reason to like Pinduoduo is the company’s steady path to profitability. For Q2 2020, the company’s operating loss as a percent of revenue was 6%. For the prior year comparable quarter, the operating loss as a percent of revenue was 12%. I believe that as top-line growth remains healthy, the company will be profitable at the operating level in the coming quarters. This can take PDD stock higher.
China does have bigger players like Alibaba and JD.com. However, with the country already the largest retail market in the world, there is room for multiple players to survive and grow. Pinduoduo looks interesting among the growth stocks.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.