One of the biggest beneficiaries of the coronavirus pandemic was the e-commerce industry. The pandemic’s initial lockdowns resulted in people working from home, social distancing, and, more importantly, shopping online. Out of an abundance of fear of catching the virus, people ordered essentials and electronics on Amazon (AMZN) and other online shops and used Instacart for groceries.
While e-commerce was already growing by leaps and bounds, 2020 was a game-changing year for the industry and e-commerce stocks. E-commerce went from a convenience to a necessity. It changed how we shop and how retail companies operate. Even as the economy continues to open up and more stores and businesses open their doors again, these changes are here to stay.
E-commerce as a percentage of overall U.S. retail sales increased from 16% in 2019 to 21% in 2020, and there’s a lot more room for growth. Long-term, the industry is a great investment opportunity, but there are some hurdles in the months ahead. In this article, I will evaluate 5 of the biggest names in e-commerce at the moment: Amazon.com, Inc. (AMZN), eBay Inc. (EBAY), Shopify Inc. (SHOP), Alibaba Group Holding (BABA), and Wayfair Inc. (W).
Let’s take a closer look at the e-commerce industry as a whole before we analyze these five stocks:
What is E-commerce?
E-commerce is a business model that allows businesses and individuals to buy and sell items and services over the internet. Shopping can be done through computers, tablets, and smartphones. E-commerce can be a substitute for shopping at traditional brick-and-mortar stores but some retailers offer both. The business model also provides companies with a wider market presence since they can sell to almost anyone in the world.
The industry can be categorized into four segments: Business to Business, Business to Consumer, Consumer to Consumer, and Consumer to Business.
Business to Business (B2B)
The B2B e-commerce model is when businesses sell their goods and services to another company. Businesses can buy products and services for their own business or sell to an end customer. SHOP is a perfect example of this model.
Business to Consumer (B2C)
The B2C e-commerce model involves businesses selling goods or services directly to individual consumers for their own personal use. This method bypasses third-party retailers, such as retail stores, and delivers their goods or services to the end customer through online stores. A great example of this is the Nike (NKE) website, where consumers can purchase sneakers directly from the company.
Consumer to Consumer (C2C)
The C2C business model is considered an online marketplace, where individual consumers can exchange goods and services through personal or third-party sites. EBAY and Etsy (ETSY) are great examples of this type of model
Consumer to Business (C2B)
The C2B model is the final model, where individuals such as freelancers sell their goods or services to a business. The consumer can set their own pricing for their work, and businesses come to them to purchase their services. The freelancing company Upwork (UPWK) is an excellent example of this type of model.
Benefits of E-commerce
The reason e-commerce has been growing, even before the pandemic, is due to its many benefits.
First and foremost, e-commerce provides a convenience that physical storefront can’t match. Unlike physical storefronts, you can buy and sell products whenever or wherever you want.
When you shop online, you have an enormous number of products to go through. Even at the same online store, you are likely to see more variety than you ever would at a physical store. For instance, if you go to the store and can’t find something, you will likely find that item somewhere online.
If you’ve ever shopped, I’m sure you’ve tried to compare prices at different stores. With e-commerce, you can compare online prices almost in an instant. Whether it’s through Google (GOOGL) Shopping or on sites specifically made to compare prices, e-commerce makes it easier and faster to compare the prices of goods.
Unlike physical storefront, online businesses don’t need to pay for a physical space. This cost-savings is typically passed onto the consumer in the form of lower prices for goods and services.
While there are many advantages, there are a couple of disadvantages for e-commerce. For instance, customer service is typically delayed. When you’re in a physical store, you can find an associate to answer your questions. In an online store, you may have to wait a day or two to get a response to your question.
In addition, you also can’t touch products or look at them up close at an online store. The online shop images don’t always give you a complete impression of a product or meet your expectations. Even so, the advantages greatly outweigh the disadvantages when it comes to shopping online.
History of E-commerce
Believe it or not, the beginning of e-commerce started in the 1960s when the Electronic Data Interchange (EDI) replaced the traditional mailing of documents by allowing a digital transfer of data from one computer to another. Then in 1979, English inventor Michael Aldrich introduced electronic shopping. He connected a modified TV to a transaction-processing computer through a telephone line.
This allowed him to connect his television to a supermarket to have them deliver the groceries. Aldrich named his invention “teleshopping.” In 1982 Boston Computer Exchange launched as the world’s first e-commerce company. It served as an online marketplace for people selling their old computers. Ten years later, Book Stacks Unlimited launched as the first online book marketplace. Originally, the company used the dial-up bulletin board, but then switched to the internet two years later.
On August 11, 1994, Phil Brandenberger of Philadelphia made the first-ever credit card purchase using encryption over the internet. This marked the beginning of the modern e-commerce era. One year later, AMZN launched as an e-commerce platform for books. In 1998, PayPal (PYPL) launched as an e-commerce payment system. The 2000s saw AMZN expand and implement Prime and other major sites such as EBAY launch. Over the past decade and more, every major store has created an e-commerce presence.
Future of E-Commerce
While the history of e-commerce is filled with significant milestones, the future hasn’t been written yet. But there are three major themes we can expect.
The first major theme is personalization. While we are accustomed to knowing what we want when we shop, stores are likely to make the online shopping experience more personalized. That means knowing a customer’s buying habits through prior items purchased, items added to carts, demographics, and other actions through the use of internet cookies that track your movements.
This allows businesses to increase profits and consumers to get a more personalized experience. While this has already started at many online stores, expect much more personalization in the years to come.
More and more consumers are purchasing through their mobile devices. Over half of e-commerce sales are done through a mobile device. Mobile devices are getting faster and more efficient, which means this percentage is likely to continue growing. Companies will continue to make the mobile shopping experience easier and more enjoyable.
The pandemic led to brick-and-mortar stores developing an online presence and omnichannel capabilities and online-only stores to creating physical storefronts. The future isn’t just online shopping. The companies that offer a seamless omnichannel experience will be the future winners.
This is one reason why AMZN purchased Whole Foods. Walmart (WMT) has become a threat through its vast online shopping portal and the sheer number of physical storefront locations. With an omnichannel experience, you can order online and pick up the product at a physical location within hours. In many cases, you don’t even need to leave the car. You get the convenience of ordering online, but the quickness of getting your product within an hour.
E-commerce Stocks in 2021
Amazon.com, Inc. (AMZN)
AMZN is one of the largest e-commerce companies, with operations in North America and spreading worldwide. The company’s business model revolves around its Prime membership program and is supported by its vast distribution network. The Whole Foods Market acquisition provided a physical footprint in the supermarket space. AMZN has a dominant position in the cloud-computing market driven by Amazon Web Services (AWS), one of its higher-margin businesses.
The company benefits from its numerous competitive advantages. Its expanding customer base of AWS should continue to help AMZN’s dominance in the global cloud space. Its online retail business is hard to beat when it comes to price, selection, and convenience, especially with the loyalty of its Prime members. AMZN is also doing well with its device strategy. Its Alexa-powered Echo devices are flying off the shelves and helping the company to sell more products and services.
The stock has an overall grade of C, translating into a Neutral rating in our POWR Ratings system. The company has Sentiment Grade of A, as it’s well-liked by the “Smart Crowd.” For instance, forty-five analysts rate the stock a Strong Buy or Buy. AMZN has a Quality Grade of B due to its strong balance sheet. The company has a current ratio of 1.1, which indicates it has more than enough liquidity to handle short-term obligations.
We also grade the company based on Growth, Value, Momentum, and Stability. You can find those grades here. AMZN is ranked #11 in the Internet industry. You can find other top stocks in the industry, by clicking here.
eBay Inc. (EBAY)
EBAY is an online shopping site that allows consumers to browse through products listed for sale or through auctions by its many sellers. The company initially started as a small user-based auction site and has become a huge online store where many people buy everything from toys, electronics, and essentials. Its marketplace has been a key growth driver for the company since it separated from PYPL in 2015.
Its advertisement business has also been growing. While the company has a wide-ranging product selection, sellers may prioritize other marketplaces with more customers, such as AMZN. In addition to AMZN, the company also has to compete with other merchants with marketplaces such as GOOGL and BABA. Much of the company’s traffic comes from GOOGL, which can change its search engine algorithm, resulting in less traffic and revenue for the company.
The stock has an overall grade of C or a Neutral rating in our POWR Ratings system. The company has a Growth Grade of C, which is concerning. While earnings rose in its recent quarterly report, they are expected to drop in the current quarter. The company also has a Sentiment Grade of D, which means it is not as well-liked by Wall Street analysts. Only ten out of thirty analysts have a Buy or Strong Buy rating on the stock.
To access EBAY’s other grades (Value, Momentum, Stability, and Quality), click here. EBAY is rated #10 in the same industry (Internet) as AMZN.
Shopify Inc. (SHOP)
SHOP is an e-commerce platform that caters to small and midsize businesses. The firm has two segments, subscription solutions, and merchant solutions. The subscription solutions segment allows Shopify merchants to conduct e-commerce on a variety of platforms. Its merchant solutions are add-on products for the platform that facilitate e-commerce, including Shopify Payments, Shopify Shipping, and Shopify Capital.
The company benefited from an increase in online shopping last year and remains attractive for small businesses due to the variety of built-in features. But the company has traded at some pretty high valuations. The company is also too exposed to economic cycles with a high failure rate for its customers, especially during economic downturns. Plus, its increasing investments in product development and cloud infrastructure could make it difficult for the company to stay profitable.
The stock has an overall grade of C or a Neutral rating in our POWR Ratings system. It has a Value Grade of D due to its high valuation. The stock has a sky-high forward P/E of 303.03. The company also has a Stability Grade of D, which means its growth and stock performance are not consistently stable. For the rest of SHOP’s grades (Growth, Momentum, Sentiment, and Quality), click here.
SHOP is ranked #2 in the D-rated Internet-Service industry. However, there are some good stocks in the industry, which you can find here.
Alibaba Group Holding (BABA)
BABA is the world’s largest online and mobile commerce company, measured by gross merchandise value. It operates China’s most-visited online marketplaces, including Taobao, which is consumer to consumer; Tmall, which is business to consumer; and Alibaba.com, which is mainly business to business. The company has also expanded into other businesses such as logistics, food delivery, and cloud computing
The company is benefiting from its dominant retail position and cloud computing position in China. While the company just came out from under its regulatory cloud in China, there are some concerns. BABA is facing competition from other China e-commerce players such as Pinduoduo and JD.com (JD), and China conglomerate Tencent. The company will also have a hard time expanding into the U.S. with competition against entrenched companies like AMZN and EBAY.
The stock has an overall grade of C or a Neutral rating in our POWR Ratings system. The company has a Growth Grade of B and a Quality Grade of B. Analysts forecast strong growth as earnings are expected to rise 17.2% in the current quarter. BABA also has a healthy balance sheet with a current ratio of 1.7, which means it has more than enough liquidity to handle short-term obligations.
BABA also has a Value Grade of C, which is troubling since the stock has been trending down since November, but analyst price targets have been improving recently. For the rest of BABA’s grades (Momentum, Stability, and Sentiment), click here. BABA is ranked #21 in the D-rated China industry. There are some A, and B-rated stocks in the industry, which you can find here.
Note that BABA is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
Wayfair Inc. (W)
W is one of the world’s leading online sellers of home goods products such as furniture and home decor. The company primarily focuses on the United States, Canada, and Europe. It offers approximately 22 million products from more than 16,000 suppliers under the brands Wayfair, Joss & Main, AllModern, DwellStudio, Birch Lane, and Perigold.
The company is positioned to grow as online penetration of the home goods industry increases, which will expand its customer base and distribution network. But the company is susceptible to competition. Due to its target market, the company is competing against mass-market retailers and e-commerce giants. Plus, its investment expenses are weighing on margin expansion.
The stock has an overall grade of C or a Neutral rating in our POWR Ratings system. W has a Growth Grade of C, which isn’t surprising as earnings are expected to fall off a cliff in the second and third quarters of this year. The company also has a Value Grade of D, which makes sense with a trailing P/E of 164.24.
We also grade W based on Momentum, Stability, Sentiment, and Quality. You can find those grades here. W is ranked #27 in the B-rated Specialty Retailers industry. You can find better stocks in this industry by clicking here.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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