E-commerce stocks were among the biggest winners of the novel coronavirus pandemic. But it’s not as if the group wasn’t doing well before.
Indeed, e-commerce companies have been taking market share for some time. As Simone Peinkofer, Assistant Professor of Supply Chain Management at Michigan State University, noted:
“Even before the global Covid-19 pandemic we observed two important developments in the retail industry. First, retailers were already financially struggling and second, customers showed a steady increase in purchasing products online. The pandemic essentially accelerated these two major developments. During the pandemic, more and more customers turned to online shopping options and we will likely continue to observe this trend.”
Investors clearly agree with Peinkofer. The ProShares Online Retail ETF (NYSEARCA:ONLN) has risen 115% over the past year.
The rally well could continue. Investors still are focusing on growth over valuation, a perfect setup for e-commerce stocks. Meanwhile, profit margins should continue to improve, as online retailers fine-tune their operations and harvest the benefits of scale.
For investors who believe the group’s rally still has more room to run, here are 10 e-commerce stocks with significant growth potential:
- Amazon.com (NASDAQ:AMZN)
- Alibaba (NYSE:BABA)
- JD.com (NASDAQ:JD)
- Chewy (NYSE:CHWY)
- Overstock.com (NASDAQ:OSTK)
- The RealReal (NASDAQ:REAL)
- CarParts.com (NASDAQ:PRTS)
- eBay (NASDAQ:EBAY)
- Farfetch (NYSE:FTCH)
- Jumia Technologies (NYSE:JMIA)
Hot E-commerce Stocks: Amazon (AMZN)
A funny thing has happened to AMZN stock over the past six months: nothing. On July 10, AMZN closed at an even $3,200. It’s now down about 3% since then. The Nasdaq Composite has rallied 24% over the same period.
What’s more interesting is that ONLN, the e-commerce exchange-traded fund, has spiked 41%. And that’s despite the fact that AMZN accounts for 21% of that ETF’s holdings. ONLN’s portfolio excluding Amazon stock has risen almost 50%.
In other words, it has been the smaller, more specialty e-commerce stocks that have led the sector’s rally. That’s a noted reversal from the past. For years, there was a default assumption that Amazon could muscle out any specialty online retailer. Clearly, investors aren’t making that assumption anymore.
But I wouldn’t write AMZN stock off just yet. The stock is expensive, but a look around the sector shows that investors are willing to pay up for growth. Amazon still is driving more growth for a company its size than almost any company in history. Amazon Web Services is a cloud giant. Efforts in video and music still can pay off. I expect AMZN stock will resume its rally at some point.
Alibaba makes it two for two as far as the world’s biggest e-commerce stocks go. BABA stock has only climbed 0.8% over the past six-plus months.
At its core, the story for BABA seems somewhat similar to that for AMZN. Alibaba is seeing some pressure from smaller rivals, too. But the longer-term case still seems to hold. Alibaba has massive share and a massive lead in a massive market. Some investors may also underappreciate its cloud business.
Of course, there are huge differences. Fears that Chinese stocks will be delisted have pressured BABA stock. Those fears, at least for now, seem unfounded, but rising U.S.-China tensions could change that.
Its valuation also presents a massive difference. AMZN stock trades at 69x forward earnings; BABA a seemingly stunning 19x. That’s part of why I argued last month that Alibaba stock was an intriguing short-term play. That case hasn’t played out yet, but I believe it will at some point in 2021.
One thing we do know about Alibaba, however, is that it’s not just fears about delisting, or the Chinese economy, that are pressuring its stock. We know that because shares of its rivals are doing quite well.
JD stock has seen its run taper off somewhat of late, but the stock still is threatening an all-time high after rallying 136% over the past year. Pinduoduo (NASDAQ:PDD) has been one of the market’s standouts, climbing 126% since October 2020.
PDD stock has concerns, but JD stock looks intriguing even near the highs. Profit margins, a concern just a couple of years ago, have normalized. The company is building an impressive portfolio of online and offline businesses. Revenue growth is humming along as well.
All things equal, I’d personally pick BABA stock from among the three major Chinese e-commerce stocks. But JD stock has a pretty nice case itself.
I got CHWY half right and half wrong. I’ve been a bull on the stock since not long after its 2019 initial public offering, and personally bought shares around the time. The stock now has nearly quadrupled from my entry point.
But I also sold the stock last year, at not much more than half the current price. Its valuation seemed stretched, and competition from both Amazon and Walmart (NYSE:WMT) posed a potential threat.
As is the case with so many growth stocks, however, CHWY has blown through both of those concerns. And admittedly there’s still a great growth story here. Chewy is expanding beyond pet food and supplies into veterinary services, including telehealth. Again, investors seem to believe that there is more than enough room in the e-commerce space for smaller companies to thrive next to Walmart and Amazon.
That said, its valuation is something to behold. Chewy now has a market capitalization of $48 billion. It is worth remembering that the company sold itself, less than four years ago, for just $3.35 billion. At the time, that was the largest e-commerce acquisition in history.
Meanwhile, Chewy still isn’t profitable, and Wall Street doesn’t expect it to be until 2022. Its price-to-revenue multiple of 7.4x is somewhat staggering given that its gross margins are still below 25%.
There were reasons I sold below $70. At $115, those reasons still hold. So far, at least, investors have kept their focus solely on the company’s potential. CHWY, like so many other growth stocks, will need that trend to hold.
Among all the stocks in the market, let alone e-commerce stocks, few have provided the roller-coaster ride of OSTK. The chart alone is dizzying: OSTK stock incredibly touched $2.53 in March, and $128.50 in August. That’s a nearly 5,000% (yes, five-thousand-percent) rally in five months.
Beyond the chart, this remains one of the market’s most fascinating names. There’s the blockchain angle. A former Overstock short-seller is now a major shareholder and one of its most vocal bulls. There was the 2019 resignation of founder Patrick Byrne, who claimed he had been used as part of a “deep state” plot involving a Russian spy, and who turned up again late last year making allegations of election fraud.
OSTK stock has settled down somewhat in recent months. And what’s interesting going forward is that the long-term investment case is relatively straightforward.
The blockchain business has obvious potential, but still quite a bit to prove in terms of ever generating material, consistent profit. For the legacy e-commerce business, the question essentially is the same.
Overstock had been profitable, if thinly so, before Wayfair (NYSE:W) showed up. Wayfair’s willingness to run at a loss (and drive up search advertising rates in the process) led Byrne to make an ill-fated attempt to try the same tack. New management and the pandemic have put Overstock back in the black. When normalcy returns, can it stay there?
REAL stock has been one of the winners in the recent huge rally in small-cap stocks. Shares have doubled since late November.
There could be more upside ahead, for one key reason: the IPO of Poshmark (NASDAQ:POSH). POSH more than doubled on its first day of trading, moving its valuation to a cool $7 billion-plus. POSH stock now trades at nearly 30x trailing twelve-month revenue.
In contrast, REAL sits at 7.5x sales. It’s difficult to imagine that gap remaining so wide, particularly given a far smaller divergence in top-line growth rates.
To be sure, that could mean POSH stock winds up pulling back, particularly if market sentiment finally turns. In the meantime, however, there’s not much reason to believe the rally in REAL stock is over.
There is some reason for skepticism toward CarParts.com. With one exception, PRTS stock has been dead money for years, going back to 2013 when the company was still known as U.S. Auto Parts Network.
That exception was pretty significant, however. PRTS raced from under $2 in March to $15 by August. Few stocks were bigger “pandemic winners.”
Sideways trading has returned, but there is a case for another leg up. By the standards of e-commerce stocks, PRTS stock is rather cheap, at less than 2x trailing twelve-month revenue. The company hasn’t quite reached profitability yet, but should do so relatively soon. Presumably, growth should continue given that auto part sales remain largely an in-store effort.
Of course, that remains the key risk. The “big three” retailers in the sector haven’t yet ramped up their online sales. Given existing user bases, they could probably do so quickly. The as-yet unanswered question is if CarParts.com will be able to hold the giants off when that day comes.
There aren’t a lot of value plays among e-commerce stocks, but EBAY is probably the cheapest stock in the space. Shares trade for just 15x forward earnings.
Of course, there’s a reason for that. EBay is growing at a slower rate than its younger peers. But it’s still growing at a rather nice clip. Adjusted earnings per share rose 22% in 2019, and the company is guiding for a rate in the range of 20% for 2020.
Obviously, the pandemic has boosted results over the past few quarters, by increasing the number of both buyers and sellers. Share repurchases have helped as well. Still, profits are rising, and the sales of StubHub and the classifieds business have put billions more on the balance sheet.
EBAY doesn’t have the same upside potential as younger, fast-growing e-commerce stocks. But with valuations across the sector stretched, EBAY stock does at least look like an intriguing play.
FTCH stock too has been a big winner since November, roughly doubling over that period. But what makes the stock an interesting growth pick is that there was real news underpinning the rally — something that hasn’t always been the case in this market.
In November, Alibaba took a $300 million stake in the platform. The capital positions Farfetch to accelerate its growth. The partnership with Alibaba opens up the potentially lucrative Asian market.
Later that month, the company posted an impressive third quarter earnings report that crushed Wall Street estimates.
So even in a fast-growing sector, there don’t seem to be many better growth stories than Farfetch. Indeed, InvestorPlace’s Luke Lango called the company the potential “Amazon of luxury fashion.”
The concern, once again, is valuation. Farfetch now has a market capitalization of $20 billion against revenue of $1.5 billion and still-significant losses. Bulls like Lango are betting on the company’s potential, but skeptics might worry that potential is getting close to priced in.
Jumia Technologies (JMIA)
As bad as valuations for some e-commerce stocks look, JMIA’s fundamentals might be the worst. With yet another rally in recent sessions, Jumia stock now has risen more than fivefold since the beginning of October. It trades at 21x revenue despite relatively tepid growth through the first nine months of 2020.
By any measure, JMIA stock looks overvalued — and potentially dramatically so. Yet investors continue to push the price higher.
There is some logic to the rally, as I wrote earlier this month. Bulls are hoping that Jumia can become the “Amazon of Africa,” and are paying up for the promise. Meanwhile, near-term results are hampered by the fact that the infrastructure required for growth doesn’t yet exist in a number of key markets.
With JMIA up 20% since I made that call, I’ll have to admit that I’m once again siding with the skeptics. But it’s still worth remembering that the skeptical side has not been the profitable one over the past ten months.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.