E-commerce stocks are facing a tough economic environment as consumers cut back on spending, but growth should continue as larger players take market share from brick-and-mortar retailers, leaving investors with an opportunity to put money into attractively priced online consumer retail stocks.
“The retail industry has changed a lot over the past four years, but one thing remains the same: As consumers emerge from difficult times, the shift from brick-and-mortar retail to online commerce will be inexorable once again,” said Sean Dunlop, senior equity analyst at Morningstar. “Investors would be well-served to accumulate quality stocks trading at deep discounts.”
Dunlop named these two stocks as his top picks from this group:
“Over the longer term, e-commerce's status as a low-cost channel should solidify its durable market share gains. As fulfillment costs fall with increased route density and utilization, we expect the channel to become cost-competitive against a wider range of lower-priced, higher-turnover goods,” Dunlop says. “Even after adjusting for fulfillment costs, the average online marketplace operator in our study region generates roughly twice the revenue of the average brick-and-mortar operator, due to their larger store footprint and more productive employees,” he explains.
Dunlop also features four other companies.
- Amazon
- Ebay Ebay
- Ötzi
- MercadoLibre Meri
Post-COVID retail stock market
U.S. e-commerce sales surged during the global COVID-19 quarantine, growing 42.7% between 2019 and 2020. This is set to slow significantly, increasing by just 7.4% between 2022 and 2023. While the outlook for next year is grim, Dunlop predicts industry growth will gradually increase over the next few years, from 5.5% this year to 10.3% in 2028.
The outlook “reflects a weaker near-term consumer spending outlook, with rising interest rates and recovering savings rates acting as powerful headwinds,” he said.
U.S. retail revenue growth is expected to slow over the next five years, averaging just 7.8% compared to 18% annual growth over the past five years, but that's still 3.9 times faster than projected brick-and-mortar retail spending, Dunlop said.
By 2028, nearly 20% of U.S. retail sales are expected to come online, up from 15%-16% today. “Online commerce's labor- and space-efficient model is cheaper to operate, and we don't see a cap approaching in the near future. [on average] “Online marketplaces are dominating brick-and-mortar stores,” Dunlop explains. At the same time, “the largest online marketplace operators we track are expected to see a cumulative increase in take rates of around 2.4 percentage points over the next five years as they branch out further into ancillary services such as advertising, financial services and logistics.”
More than half of this growth, 53%, is due to advertising. Dunlop expects Amazon, MercadoLibre and Allegro to emerge as the “clear winners” from these trends. “High customer frequency and a high percentage of customer online spend will solidify their position as keystone partners in their respective markets. We also believe Etsy, eBay and Chewy will likely continue to benefit, although their weak total merchandise sales per user and low regional market share make them second-tier partners in the overall retail ecosystem.”
Top E-commerce Stocks
“Our key lesson is that in industries that naturally adapt to winner-take-all, or at least winner-take-most, dynamics, investors need to be careful to concentrate their capital in companies that dominate niches and benefit from self-reinforcing market network effects,” Dunlop says.
“Investors would do well to buy into the winners among e-commerce platforms such as Amazon, MercadoLibre, Etsy and Allegro at attractive prices, as the winner-takes-most competitive dynamics mean these companies are getting stronger every year,” he says.Worth a more cautious approach are “companies like The RealRealReal that have not yet consolidated market share and are operating without a proven economic model,” which are at risk of falling in value.
Dunlop believes second-tier players may eventually become irrelevant, especially given their position in smaller vertical markets where they may not need to stand alone: ”E-commerce investors should invest in a few winners and avoid all others like the plague, or at least wait until they are more competitive.”
Here is an excerpt from Dunlop's commentary on e-commerce stocks recommended by the company.
Allegro
“We believe there is significant opportunity to benefit from Allegro's BNPL lending partnerships and an underpenetrated retail media network that we believe is underappreciated. Strong local markets have been able to defend their territories so far, and we see no structural impediments to expanding Allegro's advertising beyond its current 1.8% to 3% of GMV.”
—Sean Dunlop
Chewy
“With the online pet consumables, retail and healthcare market split between Chewy, Amazon and, to a much lesser extent, Walmart WMT, Chewy appears to be an attractive long-term investment.”
—Sean Dunlop
Amazon
“It's no coincidence that Amazon has far superior profitability per user, reflecting its global customer base, the high purchase frequency and volume of those customers, and proximity to transactions. The company scores uniquely high on all four dimensions of an effective marketing platform: automation, identification, shoppability, and attribution.”
—Dan Romanoff, Senior Equity Research Analyst
Ebay
“We are positive about eBay's strategic framework. After divesting many non-core segments, its marketplace resembles the vibrant platform it was in the early 2000s, and the company is focused on its core competencies of price discovery for non-new, seasonal items. After failed expansions into fulfillment services and lower-value customer segments, the company is prioritizing its flagship 'focus categories', with authentication services, tuck-in acquisitions and expansion into vertical investments driving healthy growth of eBay's most distinctive inventory. These categories now represent 30% of gross merchandise volume (GMV) and are skewed towards 16 million high-value 'enthusiast' buyers who spend more than $3,000 annually on the commerce platform.”
—Sean Dunlop
Etsy
“Etsy has carved out an interesting playing field as it competes for e-commerce wallet share across a variety of disparate verticals in the long tail of unbranded products. Its marketplace properties (Etsy, Reverb, Depop) all target non-commoditized inventory, generate commissions on third-party peer-to-peer selling, and strive to create a 'treasure hunt' experience around a suite of products that are unique, customizable, and consequently have low price elasticity. The company's core 'Etsy' marketplace accounts for approximately 90% of total consolidated merchandise volume.”
—Sean Dunlop
MercadoLibre
MercadoLibre is a winner among local marketplaces in Latin America: “The combined effect of Mercado Pago's robust, multifaceted growth is increased penetration into the formal financial system. The company's Latin American footprint overall is experiencing some of the strongest annual e-commerce growth rates in the world. And it is growing its commerce business' market share, with more than one-third of online commerce volume in the region now passing through MercadoLibre's commerce platform, up five percentage points since 2019.”
—Sean Dunlop
