E-commerce stocks are expensive but have roaring growth rates

E-commerce stocks are expensive but have roaring growth rates by Michael McKenna
E-commerce companies are still growing at 30% y/y despite the Covid-19 pandemic. The red hot growth rates do come with high valuation but that should not scare away investors from investing in e-commerce companies.

With the Q3 earnings season almost done and the Covid-19 pandemic still raging on across the globe it is time to look at e-commerce companies which got the biggest boost this year. We have identified 48 companies operating within e-commerce as their primary domain (see list at the bottom) with combined market value of $3.5trn representing around 6% of the global equity market. These companies are still growing rapidly with the average growth around 30% y/y based on their latest earnings reports. As a group e-commerce companies are still not delivering positive ROIC numbers but is primarily a function of a lot of smaller e-commerce companies focusing on revenue growth in stead of profitability. The average ROIC among the 10 largest e-commerce companies is around 5% impacted negatively by China-based Pinduoduo.

Analysts continue to be positive on the industry with the average price target being around 16% higher than the current price level. If this e-commerce group collectively delivers 16% over the next 12 months that is a very attractive return given the uncertainty in the economy. The high growth does not come cheap with the average valuation on 12-month forward EV/EBITDA being 69x or 5 times more expensive than the global equity market. But valuation should scare investors from investing in e-commerce companies. The lesson from Microsoft is that its stock was also 5 times more expensive than the US equity market in 1986 but has still managed to deliver 26.6% annualised return excluding dividends for its shareholders. The lesson is, that if you are picking tomorrow’s winners valuation means less as the market often undervalues the long-term compounding effects of a winning business.

Another important principle worth considering is the fact that per definition all the biggest companies in the equity market today, or at any given time, was a high-growth company and thus if you are long-term winner your objective should be to pick the long-term winners. Said in another way, long-term investors should focus on growth companies.

Name Region (*) Market Cap (USD mn.) Sales growth (%) ROIC (%) Diff to PT (%) 12M Fwd EV/EBITDA
Amazon.com Inc Global 1,574,189 20.5 13.4 21.5 24.2
Alibaba Group Holding Ltd China 718,752 35.3 9.4 28.8 18.3
Meituan China 217,599 49.5 2.8 4.3 71.2
Pinduoduo Inc China 133,487 129.7 -34.4 -19.4 #N/A
JD.com Inc China 129,636 24.9 8.7 6.1 25.8
Shopify Inc Global 115,465 47.0 -0.9 18.2 241.1
Booking Holdings Inc Global 81,911 3.7 4.3 -5.2 25.7
MercadoLibre Inc Brazil 64,933 59.5 3.3 10.9 189.8
NetEase Inc China 61,909 15.8 15.1 15.7 16.1
eBay Inc Global 32,888 0.5 27.2 30.2 9.4
Chewy Inc United States 26,379 37.2 #N/A 11.7 221.0
Delivery Hero SE MENA 25,351 86.1 -26.9 6.1 #N/A
Wayfair Inc United States 25,035 34.6 0.8 18.9 36.4
Zalando SE Europe 24,966 20.3 9.3 4.4 31.2
Ocado Group PLC United Kingdom 23,174 9.9 -4.2 -10.8 198.7
Trip.com Group Ltd China 21,054 15.2 0.4 -7.5 32.8
Expedia Group Inc Global 16,933 7.5 -17.1 -5.1 21.9
Just Eat Takeaway.com NV Europe 16,680 79.0 -1.2 24.4 38.8
Etsy Inc United States 16,466 35.6 18.2 22.6 31.8
Rakuten Inc Japan 15,345 14.7 -4.0 13.5 -16.6
Farfetch Ltd Global 14,475 69.5 -46.3 -7.5 799.0
Vipshop Holdings Ltd China 14,128 10.0 19.9 2.2 10.0
HelloFresh SE Europe 9,108 41.4 48.9 29.7 16.8
ZOZO Inc Japan 8,252 6.0 55.9 6.4 19.0
THG Holdings PLC (Hut Group) Global 7,898 24.5 #N/A 33.3 36.9
Williams-Sonoma Inc United States 7,452 4.0 17.1 4.1 10.2
Dada Nexus Ltd China 6,990 61.3 -43.3 17.0 #N/A
Grubhub Inc Global 6,820 30.3 -6.5 2.0 42.0
Mercari Inc Japan 6,380 47.6 -12.1 28.7 106.3
ASOS PLC United Kingdom 6,029 19.4 17.8 9.9 15.7
Fiverr International Ltd United States 5,643 41.8 -7.3 7.2 217.5
ANGI Homeservices Inc United States 5,383 17.1 0.2 26.8 28.0
boohoo Group PLC United Kingdom 4,593 44.1 30.4 57.9 16.7
LendingTree Inc United States 4,096 44.7 0.7 15.1 28.6
Stitch Fix Inc Global 3,924 8.5 -10.7 -19.5 42.0
Qurate Retail Inc Global 3,629 -4.3 11.2 22.8 4.6
LivePerson Inc United States 3,556 16.7 -30.8 31.0 90.3
Stamps.com Inc United States 3,518 -2.6 21.2 93.3 15.2
TripAdvisor Inc Global 3,385 -3.4 -12.9 -10.1 20.1
Baozun Inc China 3,061 35.0 7.9 14.4 20.2
Shop Apotheke Europe NV Germany 2,940 29.9 #N/A 20.8 91.0
Shutterstock Inc Global 2,490 4.4 15.7 11.4 14.5
MakeMyTrip Ltd India 2,457 5.3 -38.6 -15.6 #N/A
Overstock.com Inc United States 2,226 -19.9 3.6 93.4 20.5
Yelp Inc Global 2,138 7.6 -2.2 -3.1 10.3
eHealth Inc United States 1,897 101.4 15.4 74.7 8.9
Jumia Technologies AG Africa 1,051 24.3 -164.2 0.8 #N/A
PetMed Express Inc United States 645 0.2 27.6 3.6 12.2
Aggregate / mean 3,485,674 29.6 -1.9 15.7 69.1

Source: Bloomberg and Saxo Group
* Region is the main geographical revenue segment, and global if geographical segments are almost equal

 

Topics: Equities Amazon.com Technology Consumer Spending

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