E-commerce stocks have been among the strongest performers of the year, dominating the stock market since the onset of the pandemic. While the market witnessed a broad sell-off recently due to the surge in coronavirus infections and the concerns over the fiscal stimulus, investors are looking forward to a promising holiday season. As the season kicks in, more shopping will certainly be done online than ever before.

Companies in the e-commerce segment have outperformed the market so far in 2020. This is evident from the 88% year-to-date gain of Amplify Online Retail ETF (IBUY), one of the oldest funds dedicated to e-commerce, compared to SPDR S&P 500’s (SPY) 2.9% return over the same period. A significant number of brick-and-mortar stores have already filed bankruptcies, while some have shifted to online business. E-commerce is projected to grow to $6.5 trillion globally by 2024, from last year’s $3.4 trillion, providing quite a compelling backdrop for the e-commerce players.

The market sell-off last week is an indication of some more correction this month on the existing concerns. However, e-commerce stocks seem dependable. So, it’s wise to buy Alibaba Group Holding Limited (BABA), Chewy, Inc. (CHWY), and Farfetch Limited (FTCH) in every dip. These companies are driven by long-term trends and could be highly profitable in the long run.

Alibaba Group Holding Limited (BABA)

BABA operates as an online and mobile commerce company in China, providing internet infrastructure, e-commerce, online financial, and internet content services. It owns and manages both wholesale and retail marketplaces and third-party online and mobile commerce platforms. BABA has operations in four primary segments – Core Commerce, Cloud Computing, Digital Media & Entertainment, Innovation Initiative, and others.

BABA has been developing its cloud segment for a decade. The company has recently unveiled Alibaba Cloud’s first cloud computer, a cloud-native intelligence product to accelerate customer’s digital transformation. BABA has also entered into a strategic collaboration with auto giant BMW by signing a memorandum of understanding (MoU) to promote digital transformation across businesses. Moreover, the company has a 33% stake in the fintech firm, Ant Group, and stands to benefit from its record-breaking IPO.

Note that BABA is one of 5 stocks in the Reitmeister Total Return portfolio. Learn more here.

BABA is scheduled to report its financial results for the fiscal second quarter ended September 2020 on November 5th. Top-line for the last reported quarter increased 34% year-over-year to $21.76 billion as annual active consumers on retail marketplaces reached 742 million, an increase of 16 million compared to the preceding quarter. The mobile monthly active users increased by 3.3% quarter-over-quarter to 874 million. Income from operations came in $4.91 billion, increasing 42% year-over-year.

EPS for the quarter came in at $2.15, implying a year-over-year increase of 18% and an earnings surprise of 7.5%. The company has also beaten the street estimate in each of the trailing four quarters. BABA has become one of the biggest names in the cloud computing market in a short span. It is the biggest provider of Infrastructure-as-a-service (IaaS) in Asia, and the third-largest platform in the world. Hence, analysts expect current year revenue and EPS to grow 37.8% and 24.2%, respectively, year-over-year.

BABA-owned Lazada has recently suffered a data breach for its grocery delivery business in Singapore. It was reported that as many as 1.1 million accounts on RedMart were compromised and personal information linked to those accounts were illegally accessed. The market will soon discount the news. Moreover, besides the perception of weak corporate governance, BABA faces geopolitical risks from Trump imposing tariffs on Chinese imports to threatening to delist Chinese stocks to potentially blacklisting Ant Financial. These factors make BABA a perfect candidate to buy the dip.

BABA was down 2.5% to close Friday’s trading session at $304.69. The stock has gained 43.7% year-to-date and is currently trading just 4.6% below its all-time high of $319.32.

How does BABA stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

A for Industry Rank

A for Overall POWR Rating

You can’t ask for better. The stock is also ranked #1 out of 115 stocks in the China industry.

Chewy, Inc. (CHWY)

CHWY engages in the pure-play e-commerce business in the United States. The company is the biggest online platform that provides pet food, supplies and medications, and other pet-health products and services through its website and mobile application. It is often referred to as the Amazon (AMZN) pet food and supplies market.

CHWY has recently launched “Connect With a Vet,” a service that connects pet owners with veterinarians through a proprietary tele-triage platform, as pandemic disrupts vet visits. Moreover, the company went for a follow-on offering of its common shares worth $282 million in September to raise additional capital.

The last financial results reported by CHWY was for its fiscal second quarter ended August 2nd, 2020. The company delivered $1.7 billion in sales, growing 47% year-over-year as active customers grew 38% year-over-year. The demand for pet food has dramatically surged as the pandemic witnessed a rise in animal adoptions and fostering. While the gross margin of 25.5% expanded 190 basis points compared to the year-ago quarter, adjusted EBITDA of $15.5 million improved 153% year-over-year.

CHWY reported a loss of $0.08 per share, significantly improving from the year-ago loss of $0.21 and beating the consensus estimate by 50%. CHWY has an impressive earnings surprise history with the company beating consensus estimates in three of the trailing four quarters. Moreover, the street expects EPS to grow 132.1% annually in the next five years.

However, PetSmart, Inc, and CHWY have recently split three years after their tie-up, effectively eliminating CHWY as a subsidiary of PetSmart. Additionally, the stock posted a strong recovery after the September sell-off and presently commands a price-to-sales ratio of 4.19, way above the sector’s average of 1.01. Hence, CHWY may witness a near-term correction.

CHWY has immensely benefited from the booming online retail business amid the pandemic, gaining more than 112% year-to-date. However, the stock fell nearly 9% on Friday to close the session at $61.60. It is presently trading 17.7% below its 52-week high of $74.84.

It’s no surprise that CHWY is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Peer Grade, and Industry Rank. In the 34-stock Consumer Goods industry, it is ranked #7.

Farfetch Limited (FTCH)

FTCH provides an online marketplace for luxury goods that unites various independent fashion boutiques. The company offers clothing, shoes, bags, accessories, jewelry, and beauty products. The company operates Browns retail stores, Stadium Goods retail stores, and New Guards Off-White stores and has over 1200 luxury sellers serving over 2.5 million customers It operates in three segments – Digital Platform, Brand Platform, and In-Store.

Bambuser AB has recently entered into a pilot agreement with FTCH, launching Live Video Shopping with the leading global platform for luxury fashion, connecting customers in over 190 countries with more than 1,300 items of the world’s best brands. Moreover, FTCH also announced an exclusive collaboration with Marni, an Italian fashion house, in July, to present Zooterico, a design collection of furniture and other home objects.

FTCH is scheduled to report the financial results for its third quarter ended September 2020 on November 12th. The top-line for the last reported quarter increased 74% year-over-year to $365 million. The company witnessed a surge in online adoption driving significant volume growth with traffic up more than 60%, more than doubling of app installs, and the addition of the largest ever cohort of more than half-a-million new customers. Gross Merchandise Value (GMV) and Digital Platform GMV grew 48% and 34% year-over-year, respectively.

The company reported a loss of $1.29 per share in the quarter, deteriorating from the year-ago loss of $0.1 per share, primarily due to a non-cash impact. However, FTCH observed unprecedented levels of user engagement, mobile app transactions, and its ACCESS loyalty program ramping up to 2 million members, which all bodes well for opportunities to drive sustained growth in the future. Hence, analysts expect next year EPS to grow by 43.1%.

As an e-commerce platform, FTCH has an advantage over its brick-and-mortar peers right now, but the company is likely to come under pressure with the global economy in recession. The stock is due for a breather. FTCH closed Friday’s trading session at $28.13, with a year-to-date gain of 171.8%. It is presently trading 11.8% below its 52-week high of $31.88.

FTCH’s POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade, Peer Grade, and Industry Rank, and a “B” for Buy & Hold Grade. Among the 58 stocks in the Internet industry, it’s ranked #11.

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BABA shares were trading at $310.84 per share on Monday afternoon, up $6.15 (+2.02%). Year-to-date, BABA has gained 46.55%, versus a 4.06% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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