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This year is likely to see a return to normalcy with ecommerce taking away bigger and bigger slices of the total retail pie. Commerce Department numbers for the last quarter is proof of this: ecommerce sales in the second quarter grew 7.5% over 2Q22 (up 2.1% sequentially), with total retail sales increasing 0.6% (flattish sequentially). Ecommerce accounted for around 15.4% of total U.S. retail sales.
As the back-to-stores trend recedes, convenience is returning as a major factor driving volumes in this industry and this is particularly true of Gen-Z, which is becoming a more relevant component of sales. Many of these buyers have grown up on the Internet and are accustomed to a much higher level of digitization. They are also likely to hang out on popular social media platforms, allowing themselves to be influenced by the latest trends there. This is driving an entirely new perspective on the ecommerce space, one that is likely to expand with more advanced technology such as AR/VR and the Metaverse.
Valuation although down over the past year, remains an issue, reflecting the significantly stronger growth prospects. Several stocks in this extremely diverse industry are worth buying today, but we’ve picked three: Qurate Retail Group, Rover Group and Travelzoo.
About The Industry
Internet - Commerce continues to evolve as the technologies driving it advance.
On the one side are increasingly powerful and capable user devices. On the other are increasingly sophisticated platforms often combining chatbots an/or social media. While AI continues to deliver increased user satisfaction, the metaverse promises another paradigm shift.
Differentiation comes from better technology for improved showcasing, easier navigation and payment, speedier delivery and returns, brand building, comparison shopping, loyalty, etc. as well as more shipping options, which generally tip the scales in favor of larger players. Particularly because there is fierce price competition necessitating deep discounting, which keeps prices down.
Current Trends Driving the Internet-Commerce Industry
·Holiday sales will drive results in the current quarter, but the jury’s out on the extent of the bump-up. Adobe Analytics, which was one of the first to provide estimates, said that ecommerce would increase 4.8% in the traditional season (Nov 1 to Dec 31) although retailers are beginning early pushing their discounts and in Amazon’s case, the second Prime Day in October. Mastercard’s Spending Pulse is expecting a 6.7% increase while the National Retail Federation (NRF)is projecting a 7-9% increase in the said period. eMarketer’s Insider Intelligence, which includes October, sees retail ecommerce hitting 11.3% growth this year. While overall retail is expected to be much softer according to all estimates, attributed to the impact of inflation on consumer purse strings, ecommerce will benefit from the continued to shift in shopping habits. The 2023 Deloitte holiday travel survey however indicates that consumers spending this year is less about thrift and more about choice. The survey report says that nearly half of Americans will be traveling, with intent strong across generations and income levels. Therefore, although some reports suggest fewer discounts this year because of relative normalization in inventory levels, especially at big-ticket retailers, it will probably not be as big a factor this year.
Macro conditions should continue to improve for the industry, which was pressured last year by a combination of factors, including a consumer trend back to stores, as well as a certain level of thrift as people fretted about rising costs and the possibility of a recession that would see significant job losses. As we move through 2023, it’s clear that inflation (including wage inflation) is coming down (however slowly), although job openings remain pretty decent and unemployment remains at historic lows. Therefore, there is very little in support of the recession theory. For producers, supply chain issues have alleviated while the labor situation is still tight. Global uncertainties continue to affect foreign exchange effects for companies with international operations. The higher interest rate is another pressure on producers, and by extension consumers, remaining a negative for the year. Overall, industry players will continue to see the benefits of operating leverage they have built up in the last few years. The importance of having a digital presence has never been greater, particularly considering the fact that the retail ecommerce market continues to expand into new product segments and geographies, and consumers continue to move back to the convenience of online shopping.
Ecommerce will gain at the expense of brick-and-mortar this year. The Commerce Department’s data for the first quarter shows that ecommerce growth continued at a faster pace than overall retail for the fourth straight quarter and gained a full percentage point of market share over the year-ago quarter. Therefore, this year is shaping up to be a relatively normal year, or in other words, on in which ecommerce will continue to grow at the expense of physical stores.
Ecommerce growing at the expense of physical stores doesn’t mean that a physical presence will be downgraded. In fact, with Gen Z, the demand for convenience and options will remain paramount. In many cases, this will mean faster deliveries or pickups from some nearby convenient location. Since it is only proximity to a consumer that can facilitate quick delivery, both ecommerce pureplays and traditional retailers will continue to balance ecommerce sales with a physical presence. Therefore, a hybrid/omnichannel model will remain of utmost importance, allowing customized, quick and convenient delivery (BOPIS, curbside pickup, etc.) through apps. Customers generally downgrade stores that don’t provide these conveniences. Self-driven delivery vehicles and drones are also on the horizon to deal with logistics problems and make deliveries smoother and cheaper.
A trend that Gen-Z is popularizing now is social commerce. Social commerce means the ability to discover, research, buy and checkout on a social media platform. Brands usually have store fronts on these platforms where influencers also discuss their products, thus driving traffic to them. The social element of shopping that ecommerce had taken out is thus returning through this route. Since social commerce is already popular in China, it isn’t surprising that the Chinese social media platform TikTok that’s also very popular with Gen Z is the number one place for social commerce. But others like Facebook and Instagram are also in the game. According to The Future of Commerce, “Global sales via social media platforms were es
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 relatively positive near-term prospects.
The industry’s positioning in the top 50% of the Zacks-ranked industries is the result of its relative performance versus others. What we’re seeing in the aggregate estimate revisions is significantly stronger sentiments, particularly from July. The aggregate earnings estimate for 2023 is up 32.9% and for 2024 up 11.8%. Given the continued softening in the Fed’s stance, a recession is looking increasingly unlikely, so things look set for a strong end to the year.
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 Leads on Shareholder Returns
Over the past year, the Zacks Electronic - Commerce Industry has been trading at a significant premium to both the broader Retail and Wholesale sector and the S&P 500.
The stocks in this industry have collectively gained 37.3% over the past year, compared to the 32.9% gain for the broader Zacks Retail and Wholesale Sector and the 11.6% gain for the S&P 500.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the price-to-forward 12 months’ earnings (P/E) basis, the industry trades at a 26.59X multiple, which is below its median level of 32.35X, although still a premium to the S&P 500’s (18.6X) and the broader retail sector’s20.84X.
On the basis of forward sales (P/S) for the year however, the shares look reasonably valued, although above their median level over the past year. They’re trading at a discount to the S&P 500’s 3.63X (below its median value). Over the past year, the industry has traded as high as 1.72X, as low as 1.29X and at the median of 1.45X, as the chart below shows.
Forward 12 Month Price-to-Sales (P/S) Ratio
Image Source: Zacks Investment Research
3 Stocks Worth Considering
While the industry’s valuation is still a bit rich, there are quite a large number of stocks that are currently worth picking. That’s because of the significant variety that exists in this industry in terms of lines of business, business model, location and so forth. The three stocks discussed below all carry a Zacks #1 (Strong Buy) rank.
Qurate Retail Group (QRTEA - Free Report) : Englewood, Colorado-based Qurate Retail has video and online commerce operations in North America, Europe and Asia. Other than the sale of merchandise-focused televised shopping programs, it also deals in apparel for men, women and children; as well as home, accessories and beauty products through its mobile and desktop applications. It also has a range of streaming services, social pages, websites, print catalogs, and in-store destinations to attract customers.
Formerly known as Liberty Interactive, Qurate is executing a turnaround, after strong third-quarter results and management projecting a double-digit CAGR on Adjusted OIBDA and free cash flow with stable revenues through 2024 compared to 2022.
In the last seven days, analysts have raised Qurate’s 2023 estimate by 10 cents (67%) and 2024 estimates by 3 cents (13%).
The shares are down 66.4% over the past year but the trend has been reversing since the estimate revisions.
Price & Consensus: QRTEA
Image Source: Zacks Investment Research
Rover Group, Inc. : Seattle, Washington-based Rover Group operates an online marketplace for pet care worldwide. It connects pet owners with businesses offering various pet care services, including overnight services like boarding and in-home pet sitting, as well as daytime services like daycare, dog walking, drop-in visits, grooming and training.
Rover reported strong results in the last quarter that was driven by strong revenue and bookings growth as well as operating leverage. Through its support services, the company seeks to offer increased value and improved experience to customers through their lifetimes. New customer bookings, strong retention, focus on international markets and the expansion of its product portfolio are strong drivers. Management is also optimistic about its business model, market position and team.
In the last seven days, the Zacks Consensus Estimate for 2023 has gone from $0.03 to $0.06. For 2024, they’re up from 0.08 to $0.14. Analysts expect earnings growth of 140% in 2023 and 141.7% in 2024.
The Zacks Rank #1 stock is up 61.4% over the past year.
Price & Consensus: ROVR
Image Source: Zacks Investment Research
Travelzoo (TZOO - Free Report) : New York-based Travelzoo provides travel, entertainment and local deals from travel and entertainment companies, and local businesses worldwide. It offers several services to members: Its Travelzoo website and newsletters carry deals and vouchers from local businesses, such as spas, hotels and restaurants; its Jack's Flight Club subscription service offers information about exceptional airfares; and the Travelzoo Network of third-party websites carry travel deals published by the company. It serves airlines, hotels, cruise lines, vacations packagers, tour operators, destinations, car rental companies, travel agents, theater and performing arts groups, restaurants, spas, and activity companies.
With more than 30 million members, 8 million mobile app users, and 4 million social media followers, Travelzoo is a popular destination for travel enthusiasts. Particularly so, because of Travelzoo’s global reach, trusted brand and strong relationships with top travel suppliers to negotiate more exclusive offers for members. Therefore, the current environment when Americans clearly have travel on their minds is very positive for the company. The strong demand translates to large increases in travel prices, which is typically a sweet spot for the company.
In the last 30 days, analysts have raised their 2023 loss estimates by 8 cents (11%) and their 2024 earnings estimates by 17 cents (20%).
The shares are up 46.9% in the past year.
Price Performance: TZOO
Image Source: Zacks Investment Research
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Ecommerce Industry on a Rebound: 3 Picks
This year is likely to see a return to normalcy with ecommerce taking away bigger and bigger slices of the total retail pie. Commerce Department numbers for the last quarter is proof of this: ecommerce sales in the second quarter grew 7.5% over 2Q22 (up 2.1% sequentially), with total retail sales increasing 0.6% (flattish sequentially). Ecommerce accounted for around 15.4% of total U.S. retail sales.
As the back-to-stores trend recedes, convenience is returning as a major factor driving volumes in this industry and this is particularly true of Gen-Z, which is becoming a more relevant component of sales. Many of these buyers have grown up on the Internet and are accustomed to a much higher level of digitization. They are also likely to hang out on popular social media platforms, allowing themselves to be influenced by the latest trends there. This is driving an entirely new perspective on the ecommerce space, one that is likely to expand with more advanced technology such as AR/VR and the Metaverse.
Valuation although down over the past year, remains an issue, reflecting the significantly stronger growth prospects. Several stocks in this extremely diverse industry are worth buying today, but we’ve picked three: Qurate Retail Group, Rover Group and Travelzoo.
About The Industry
Internet - Commerce continues to evolve as the technologies driving it advance.
On the one side are increasingly powerful and capable user devices. On the other are increasingly sophisticated platforms often combining chatbots an/or social media. While AI continues to deliver increased user satisfaction, the metaverse promises another paradigm shift.
Differentiation comes from better technology for improved showcasing, easier navigation and payment, speedier delivery and returns, brand building, comparison shopping, loyalty, etc. as well as more shipping options, which generally tip the scales in favor of larger players. Particularly because there is fierce price competition necessitating deep discounting, which keeps prices down.
Current Trends Driving the Internet-Commerce Industry
Zacks Industry Rank Reflects Relative Strength
The Zacks Internet - CommerceIndustry is a rather large group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rankof #84, which places it in the top 26% of 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 relatively positive near-term prospects.
The industry’s positioning in the top 50% of the Zacks-ranked industries is the result of its relative performance versus others. What we’re seeing in the aggregate estimate revisions is significantly stronger sentiments, particularly from July. The aggregate earnings estimate for 2023 is up 32.9% and for 2024 up 11.8%. Given the continued softening in the Fed’s stance, a recession is looking increasingly unlikely, so things look set for a strong end to the year.
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 Leads on Shareholder Returns
Over the past year, the Zacks Electronic - Commerce Industry has been trading at a significant premium to both the broader Retail and Wholesale sector and the S&P 500.
The stocks in this industry have collectively gained 37.3% over the past year, compared to the 32.9% gain for the broader Zacks Retail and Wholesale Sector and the 11.6% gain for the S&P 500.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the price-to-forward 12 months’ earnings (P/E) basis, the industry trades at a 26.59X multiple, which is below its median level of 32.35X, although still a premium to the S&P 500’s (18.6X) and the broader retail sector’s20.84X.
On the basis of forward sales (P/S) for the year however, the shares look reasonably valued, although above their median level over the past year. They’re trading at a discount to the S&P 500’s 3.63X (below its median value). Over the past year, the industry has traded as high as 1.72X, as low as 1.29X and at the median of 1.45X, as the chart below shows.
Forward 12 Month Price-to-Sales (P/S) Ratio
Image Source: Zacks Investment Research
3 Stocks Worth Considering
While the industry’s valuation is still a bit rich, there are quite a large number of stocks that are currently worth picking. That’s because of the significant variety that exists in this industry in terms of lines of business, business model, location and so forth. The three stocks discussed below all carry a Zacks #1 (Strong Buy) rank.
Qurate Retail Group (QRTEA - Free Report) : Englewood, Colorado-based Qurate Retail has video and online commerce operations in North America, Europe and Asia. Other than the sale of merchandise-focused televised shopping programs, it also deals in apparel for men, women and children; as well as home, accessories and beauty products through its mobile and desktop applications. It also has a range of streaming services, social pages, websites, print catalogs, and in-store destinations to attract customers.
Formerly known as Liberty Interactive, Qurate is executing a turnaround, after strong third-quarter results and management projecting a double-digit CAGR on Adjusted OIBDA and free cash flow with stable revenues through 2024 compared to 2022.
In the last seven days, analysts have raised Qurate’s 2023 estimate by 10 cents (67%) and 2024 estimates by 3 cents (13%).
The shares are down 66.4% over the past year but the trend has been reversing since the estimate revisions.
Price & Consensus: QRTEA
Image Source: Zacks Investment Research
Rover Group, Inc. : Seattle, Washington-based Rover Group operates an online marketplace for pet care worldwide. It connects pet owners with businesses offering various pet care services, including overnight services like boarding and in-home pet sitting, as well as daytime services like daycare, dog walking, drop-in visits, grooming and training.
Rover reported strong results in the last quarter that was driven by strong revenue and bookings growth as well as operating leverage. Through its support services, the company seeks to offer increased value and improved experience to customers through their lifetimes. New customer bookings, strong retention, focus on international markets and the expansion of its product portfolio are strong drivers. Management is also optimistic about its business model, market position and team.
In the last seven days, the Zacks Consensus Estimate for 2023 has gone from $0.03 to $0.06. For 2024, they’re up from 0.08 to $0.14. Analysts expect earnings growth of 140% in 2023 and 141.7% in 2024.
The Zacks Rank #1 stock is up 61.4% over the past year.
Price & Consensus: ROVR
Image Source: Zacks Investment Research
Travelzoo (TZOO - Free Report) : New York-based Travelzoo provides travel, entertainment and local deals from travel and entertainment companies, and local businesses worldwide. It offers several services to members: Its Travelzoo website and newsletters carry deals and vouchers from local businesses, such as spas, hotels and restaurants; its Jack's Flight Club subscription service offers information about exceptional airfares; and the Travelzoo Network of third-party websites carry travel deals published by the company. It serves airlines, hotels, cruise lines, vacations packagers, tour operators, destinations, car rental companies, travel agents, theater and performing arts groups, restaurants, spas, and activity companies.
With more than 30 million members, 8 million mobile app users, and 4 million social media followers, Travelzoo is a popular destination for travel enthusiasts. Particularly so, because of Travelzoo’s global reach, trusted brand and strong relationships with top travel suppliers to negotiate more exclusive offers for members. Therefore, the current environment when Americans clearly have travel on their minds is very positive for the company. The strong demand translates to large increases in travel prices, which is typically a sweet spot for the company.
In the last 30 days, analysts have raised their 2023 loss estimates by 8 cents (11%) and their 2024 earnings estimates by 17 cents (20%).
The shares are up 46.9% in the past year.
Price Performance: TZOO
Image Source: Zacks Investment Research