Electronic-Commerce Outlook: Rich Valuation Limits Picks

Electronic-commerce, the method of buying and selling goods and services via a software platform, continues to evolve as the technologies driving it get more advanced.

On the one side are user devices, which are getting bigger, brighter and more capable. Voice-controlled devices like Amazon (AMZN) Echos, Google (NASDAQ:GOOGL) Homes and Apple (NASDAQ:AAPL) HomePods are joining these to facilitate conversational commerce.

On the other side are the software platforms facilitating the transaction, which are getting AI-enabled and more sophisticated, and therefore, more capable of delivering a satisfying user experience. Social networks have started playing a bigger role today, with chatbots facilitating back-end operations and customer care.

Differentiation in the business comes from better technology for easier navigation and payment, speedier delivery and returns, brand building, comparison shopping, loyalty and so forth. So larger players are relatively better positioned for growth. At the same time, there is fierce price competition, which makes it hard to charge a premium.

A peculiarity of the market is Amazon’s complete dominance in the U.S. and its growing presence in other important markets. This is driving some traditional players to partner with Amazon and the stronger players to partner with Google to fill technology gaps. eBay (EBAY) and Expedia (NASDAQ:EXPE) (EXPE) are other significant players.

Here are the three major themes in the industry:

• Both ecommerce pureplays and traditional retailers branching into ecommerce realize the importance of physical presence because it is only proximity to a consumer that can facilitate quick delivery. So industry players are all moving toward a hybrid/omnichannel model, where customers can get quick delivery or pick up the items ordered from a physical outlet close to them, at their convenience. Self-driven delivery vehicles and drones are already on the horizon to deal with logistics problems and make deliveries smoother and cheaper.
• Because of the many details involved in satisfying a customer, data mining has grown in importance and the party controlling the customer’s data is the best positioned to deliver the desired experience. Most of the big ecommerce players are also into payments processing, which gives them further insight into a customer’s tastes, preferences and buying habits. As machines read and process this data, they can create programs and processes to maximize customer satisfaction and drive sales.
• Revenue growth rates may be expected to remain very strong as a result of more companies moving online and existing players utilizing more advanced tools and analytics to increase their return on investment. However, profitability is likely to remain under pressure because of the need to build out infrastructure to support the strong revenue growth. This will be offset by an increased focus on advertising, which carries higher margins.

Zacks Industry Rank Indicates That Challenges Remain

The Zacks Electronic - Commerce industry is a 29-stock group within the broader Zacks Retail And Wholesale sector. It carries a Zacks Industry Rank #101, which places it at the top 39% of more than 250 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates improving near-term prospects.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of some improvement in the earnings outlook of constituent companies in aggregate. Looking at the aggregate earnings estimate revisions however, it appears that the improvement in this group’s earnings growth potential hasn’t been substantial. In the past year, the industry’s earnings estimate for 2019 therefore shows a 23.6% decline.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags On Shareholder Returns

The Zacks Electronic - Commerce Industry has trailed both the broader Zacks Retail and Wholesale Sector as well as the S&P 500 index over the past year.

So we see that the stocks in this industry have collectively lost 17.9% over the past year, while the Zacks S&P 500 Composite and Zacks Retail and Wholesale Sector have lost 2.0% and 4.7%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is a commonly used method of valuing electronics focused companies, we see that the industry is currently trading at 37.4X compared to the S&P 500’s 16.6X. It is also above the sector’s forward-12-month P/E of 23.4X.

Over the past year, the industry has traded as high as 47.1X, as low as 32.6X and at the median of 41.0X, as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Bottom Line

It’s better to avoid the industry right now except for those for which there’s a compelling reason to buy, especially given that the valuation remains rich despite recent correction. The negative prospects are evident in the relatively small number of buy-ranked stocks in the industry (Zacks Ranks #1 and #2). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

So here are some stock picks for those willing to take a chance-

Alibaba (NYSE:BABA) Group Holding Limited (BABA): The Zacks Rank #1 stock is down 1.0% over the past year. The Zacks Consensus Estimate for the current-year EPS rose 7.2% in the last 60 days while for 2020 it is up 4.5%.

Price and Consensus: BABA

JD.com Inc. (JD): The Zacks Rank #1 stock has lost 0.8% over the past year. The Zacks Consensus Estimate for the current-year EPS is up 27.9% in the last 60 days and for 2020, it is up 21.4% in the last 60 days.

Price and Consensus: JD

Stamps.com Inc. (STMP): The Zacks Rank #1 stock has dropped 73.4% over the past year. The Zacks Consensus Estimate for the current-year EPS is up 8.1% in the last 60 days.

Price and Consensus: STMP

Booking (NASDAQ:BKNG) Holdings Inc. (BKNG): The Zacks Rank #2 stock has appreciated 0.6% over the past year. The Zacks Consensus Estimate for the current-year EPS is up 0.6% (62 cents) in the last 60 days and for 2020, it is up 1.7% ($1.94) in the last 60 days.

Price and Consensus: BKNG

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