Zacks also breaks down each large sector such as Retail/Wholesale and Computer & Technology into groups of companies such that there are a total of 256 such sub-sectors or industries.
These “X” industries are then grouped in two: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (industries with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. (Click here to know more:
About Zacks Industry Rank)
Therefore the Zacks Industry Rank is a good indicator of investment opportunities within an industry at any given time. Moreover, because stocks in the same X industry have certain common positive or negative factors affecting them, it has been observed that there is some positive correlation between them.
As depicted above, the Internet-supported buying and selling process includes four Zacks categorized segments, i.e. Internet - Commerce, Internet - Servicesand Internet Services - Deliveryand Internet – Software/Services.
In the last six months, the Internet - Commerce segment outperformed the S&P 500 by a wide margin. The market appreciated 22.0% during the period, compared to the S&P 500’s 7.9%. It also appreciated 9.9% year to date compared to a decline of 0.7% for the S&P 500.
Revenue growth over the past year (ending Sep 2017 for which all results are available) was 40.0%. EPS before non-recurring items was up 18.5% on a more or less consistent share count. Forward earnings estimates for 2018 are showing a big jump before the growth rate decelerates (but still remains very strong) the following year.
The Internet - Services segment appears to be in the doldrums, having appreciated just 3.7% in the last six months and -0.1% year to date.
The business has a stronger margin profile, with revenue growth of 19.5% over the past year and EPS growth of 30.0% on a share count that dropped 5.9%. Forward earnings estimates for 2018 and 2019 are showing attractive growth rates.
The Internet Services - Delivery segment has appreciated 31.8% in the last six months and 15.3% year to date.
Revenue growth of 33.8% was encouraging. Opex remains high although interest expenses have come down, impacting the EPS before non-recurring items which dropped to -$0.07 compared to $0.01 last year. The share count has increased 15.2%. The debt level has shot up as has working capital requirements. The rising intangibles could indicate industry consolidation but increase risk. The debt-to-total capitalization ratio remains manageable in the 43-44% range with the current ratio being maintained above unity.
The Internet Software/Services segment is up 5.5% in the last six months and down 5.2% year to date.
Revenue grew 15.6% off a much smaller base with EPS before non-recurring items growing 10.0% on a slightly lower share count. Still, there are opportunities here that can be exploited.
The ecommerce marketplace is influenced by both buyers and sellers. Moreover there are multiple trends, both big and small, and old and emerging, that are always in play. So it helps to take a quick look at what’s going on-
Buyer Trends & Preferences
Mobile, Wearables: These remain as important as ever as users are increasingly accustomed to anytime anywhere shopping. The online store never closes, nor does the online payments machinery. Even brick-and-mortar sales are supported by mobile apps that increase awareness of products and push promos at opportune moments. Payments tech from Apple (AAPL), Alphabet (GOOGL), Samsung, Alibaba, Paypal and others help the electronic transfer of funds to stores. eMarketer estimates that smartphones were a huge driver in 2017, accounting for 58.9% of global digital commerce in 2017.
Mcommerce will account for 72.9% of digital sales by 2021. Larger mobile screen sizes, new categories (cars, grocery, luxury that were earlier restricted to offline purchase) and greater comfort in using online payment systems are the main drivers.
Social Networking: The traditional buying experience often involves friends or family getting together to look through merchandise and select after much discussion. The online experience has been more restrictive in this respect. Despite the fact that personal recommendations and comparison shopping have been around for a while, these are helpful in making a selection, but don’t make buying a collaborative exercise. So the shopping experience has been more of a chore than fun.
Once the novelty of doing things online wears off or for those who have been doing it online from the get-go, there will be a natural tendency to start looking for more, so this is where social networks like Facebook (FB) and Twitter (TWTR) for example will start playing a bigger role. Others like Pinterest are already travelling this path.
Voice Enabled Commerce: Since it is an emerging area, hard data and projections are hard to come by. But according to the Walker Sands 2017 Future of Retail Study, mainstream adoption of voice-controlled devices like the Amazon Echo and Google Home is here. Today, around 24% of consumers own an in-home voice-controlled device and another 20% are planning to buy one over the next year.
With the most popular online retailer selling the most popular set of voice controlled devices (Amazon’s Echo family), adoption is likely to be both smooth and fast. Moreover, Google, which has already lost a huge chunk of online searches (for products) to Amazon already, simply can’t afford to lose a lot more. Nor can it pass up the potential in the market.
Google is going all out to promote and sell its smart home speaker and connect Google Assistant to home appliances so it can become more useful. Apple has also launched HomePod to mixed reviews. So this will be a very interesting year for voice-enabled commerce.
Geography Not a Barrier Any More: These days, if people want to buy something they don’t get at the retail store, the first thing they do is check online (or they might check online first and decide their point of pickup accordingly). So the world is getting ever smaller as shoppers see local, state, national and international borders melt away. Satisfaction of course leads to higher expectations.
According to Frost & Sullivan, Southeast Asia (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) is poised to become one of the world's fastest-growing regions for e-commerce revenues, growing from around $11 billion in 2015 to more than $25 billion by 2020.
According to Forrester research, the five key Asia/Pacific markets of China, Japan, South Korea, India and Australia will almost double from $733 billion in 2016 to $1.4 trillion in 2020. Size and population density in China and India make them very important markets. So let’s just touch upon prospects in the Chinese and Indian markets since they are on a very strong growth trajectory.
According to Forrester, China will remain the biggest ecommerce market in the next few years generating 9X the size of the Japanese market and 17X the size of the South Korean market by 2020.
China made up 67.1% of mcommerce sales worldwide in 2017 (83% of Asia/Pacific sales), driven by its mobile-first internet audience. Sales are expected to nearly triple from $909.93 billion to $2.595 trillion between 2017 and 2021.
With the digital revolution in China, many Chinese have multiple devices they use to research a product or shop on. Virtual reality (VR) has started playing a bigger role, taking consumers from the “VR café” experience they enjoyed in 2016 to devices enabling the experience. Moreover, all the big ecommerce companies like Alibaba, Tencent and LeEco will continue to invest heavily in VR this year.
Cross-border trade is another driver, as Chinese youngsters are extremely brand conscious and like to buy foreign goods, especially if they’re from the U.S., South Korea or Japan and especially in categories like food, dairy, personal care and beauty. But local brands are increasingly capturing mind share, especially in electronics and mobile phones. The Chinese Ministry of Commerce says that cross-border transaction value will make up 20% of total Chinese foreign business and continue to grow at over 30% a year.
The Ministry also sees a growing number of Tier 2 and Tier 3 cities coming online with only 10.6 million of the estimated 159.9 million new users between 2015 and 2018 coming from Tier 1 cities.
According to a joint study by The Associated Chambers of Commerce & Industry of India (ASSOCHAM) and Deloitte, the digital commerce market in India will expand to over $50 billion in 2018 from $38.5 billion in 2017.
Last year was a strong one for the market, helped by mobile device adoption and 3G, 4G, Wi-Fi and high speed broadband technologies.In 2017, 82% of shopping queries were made through mobile devices compared to 76% in 2016 with one out of three customers in Tier-1 and Tier-2 cities transacting through mobiles.
The apparel segment grew the strongest at 72%, followed by food items at 65%, electronic items at 63%, beauty and personal care products at 52% and home furnishings at 49%. Moreover, 28% of regular shoppers were in the 18-25 age group with 42% in the 26-35 group, 28% in the 36-45 group and 2% in the age group of 45-60. 65% of Online Shoppers are male as against 35% female.
eMarketer reported that India’s demonetization of the rupee in late 2016 had a greater-than-expected impact on consumer spending, so retail sales grew 11.8% in 2017.
Seller Trends and Strategies
Focus Shifts from Device to Consumer: This is a direct offshoot to the phenomenon that many people currently use multiple devices so that the device on which a product is researched is not necessarily the one where the purchase is completed. Also, the purchase may finally even be completed in the physical store, leading to what is being called the online to offline (O2O) trend. Therefore, it has become important to follow the customer on the various devices rather than follow the device. This understanding is still relatively nascent, but it’s a trend that is catching on.
App vs. Mobile Web: As the ecommerce market matures, it’s becoming very clear that smaller players can’t compete with what companies like Amazon offer. Also, their customers don’t already know them, which means that they aren’t eager to download their apps. These players need a platform to be able to display their wares and promote their brands. This is where Google plays an extremely useful role as the search engine can now pick out and display relevant information not just from across the web but also from individual apps that have been indexed. As smaller players are more dependent on the mobile web, its importance versus apps is increasing by the day.
Omnichannel Approach: Logistics is one of the most important considerations for ecommerce retailers. Whether building their own warehouses like Amazon does or relying on specialists like Alibaba does, ecommerce companies are required to act nimbly because customers want quick delivery and quick return options. For smaller etailers, it doesn’t make sense to go it alone as customers are hard to serve and the business is hard to scale. So they usually prefer to join an online marketplace to leverage their capabilities.
The challenge is more complex for the big players because the number of buyers and sellers is growing as is the volume of transactions. Amazon deals with this through its warehouses and encourages sellers to store with it through the Fulfillment by Amazon (FBA) initiative. FBA requires sellers to store inventory in Amazon warehouses with Amazon taking care of sales and support. This helps to cover cost of the warehouses that Amazon needs to invest in anyway. In some cases, Amazon ties with retailers to use their brick-and-mortar locations as pickup points for customers with those requirements.
Amazon has also leased 21 aircraft to support its logistics operations. It is has also taken the lead with respect to drone deliveries, having secured necessary patents and having tested the technology in countries where drones aren’t effectively banned. So just about as soon as the FAA approves the concept, Amazon drones will take to the skies.
For big traditional retailers, omnichannel is a stepping stone to the online world. They already have the logistics and physical stores in place though of course they are adjusting locations in line with expansion plans. So while they continue to invest in the physical store experience they are supplementing this with online channels to expand their reach. Book online and pick up at store is a popular model for them.
Technology Investment: Traditional retailers like Wal-Mart (WMT) and Target (TGT) want to build their online apps/websites/storefronts in a way that they can preserve their brand value while expanding their reach. Therefore, they are in competition with the big online players rather than in partnership with them. Online players are faster to adopt new technologies that help them improve navigation and customer experience, which in turn improve reviews and thus draw more traffic to them. But traditional players are pulling up their socks too.
beacon technology that enables retailers to track customers in the store and push promos and offers to them is expected to increase in importance. New payment technologies such as near field communication ( NFC), quick response ( QR) code, Soundwave and Bluetooth low energy (
BLE) are facilitating the process. Innovative new technology is influencing every aspect of the buying experience spanning gadgets like TVs and game consoles that are increasingly getting connected to digital versions of books, music, video and games that are becoming available for online purchase and consumption.
Advent of Chatbots: Social networking platforms like Facebook Messenger, Twitter, WhatsApp and Google Allo are warming up to the idea of chatbots. Businesses are increasingly operating globally, across time zones and catering to customers that expect everything to be immediately available. But it’s not always possible to have customer service people on the job at all hours because of a dearth of resources and other constraints.
But with chatbots, people can get personal queries answered as and when they require. Some platforms like Facebook Messenger already have a large number of chatbots on them, so users are getting used to the idea. And companies that can’t get people to download and/or use their apps (though Google is making this easier by crawling apps for indexing and Android Instant Apps), have the option of getting their chatbots on a social networking platform to interact with consumers.
Discounting Remains Important: The market is more competitive than ever before, so retailers compete very hard on the number and percentage of discounts. One format that Groupon (GRPN) pioneered didn’t do so well however because of the low barriers to entry and the company has since launched a marketplace to increase scale.
Emerging New Format
Alphabet has launched “Purchases on Google,” which is a variation of its usual product listing ads (PLAs) for Android and iOS devices. The objective is to speed up the purchasing process for customers. There are no additional charges/CPCs for these ads.
The Google carousel displays the products in the usual way, but if they qualify, a “Buy on Google” message appears that leads the user to a seller-branded page. Either fresh payment information or the details stored with Google allows immediate checkout from this page. Google only processes the sale but order fulfillment, customer interaction and customer data remains available to the retailer.
The broader Retail sector, of which Internet Commerce is a part, is doing better than the S&P 500 so far this quarter. Revenue growth of 7.1% bettered the S&P 500 average of 5.8% although earnings growth of 2.5% fell short of the S&P 500 average of 6.7%. For the fourth quarter, the sector is expected to report revenue and earnings growth of 8.9% and 7.2%, respectively while the S&P 500 is expected to grow 5.8% on revenue and 14.1% on earnings.
The other companies we are discussing in the ecommerce outlook fall under the broader Computer & Technology sector. The sector has done much better than retail so far in the fourth quarter, posting revenue and earnings growth of 8.8% and 21.3%, respectively. For the fourth quarter, it’s expected that revenue and earnings growth will average at 10.6% and 22.6%, respectively.
Take Your Pick
While we generally prefer stocks operating in strong industries at any point of time, a negative sector outlook doesn’t mean that there aren’t any good picks at all.
Zacks methodology helps us find the stocks that have upside potential despite the hiccups.
Top picks in the Internet Commerce industry are JD.com (JD) and Petmed Express (PETS), both of which carry a Zacks Rank #1 (Strong Buy). You can see
the complete list of today’s Zacks #1 Rank stocks here. Other good picks are Cars.com (CARS) and Mercadolibre (MELI).
QuinStreet (QNST) is the sole option in the Internet - Delivery Services industry.
The Internet – Software/Services industry is currently not an attractive sector right now although Zacks #2 ranked 58.com (WUBA) is an option.
The same is true for the Internet – Services industry although Zacks #2 ranked Facebook (FB), Tencent Holdings (TCEHY) and The Trade Desk (TTD) are options.
Retail ecommerce remains a fairly small part of total retail right now, but because it is a fast-growing part, it is increasingly accounting for a larger share. Just a year ago, we were looking at a mid-single digit share, but this year, eMarketer thinks that share will be a tenth of global retail sales.
Ecommerce sales in Asia will account for 14.7% of total retail sales, with China contributing more than half the sales, followed by Japan with slowing growth rates and then India, which will be the fastest growing. Volumes will double by 2021. This year, ecommerce will account for only 8.8% of total retail sales in Western Europe, but grow to 11.4% by 2021. Germany is the top retail market but UK the leading ecommerce region.
Government data indicates that retail ecommerce has outpaced total retail sales growth in recent times even in bad quarters for the sector. Some of this is on account of the continued shift from offline to online retail, as customers (baby boomers) move to online channels.
But it’s also because new consumers (millennials) often start out on online channels. These consumers spend more time in a connected, social environment and take for granted many of the online tools previous generations struggled to understand, appreciate and adopt. Therefore, ecommerce will likely continue to outpace total retail sales in the foreseeable future.
Don’t Even Think A
Don't Think About Buying Bitcoin Until You Read This
The most popular cryptocurrency skyrocketed last year, giving some investors the chance to bank 20X returns or even more. Those gains, however, came with serious volatility and risk. Bitcoin sank 25% or more 3 times in 2017.
Zacks’ has just released a new Special Report to help readers capitalize on the explosive profit potential of Bitcoin and the other cryptocurrencies with significantly less volatility than buying them directly.
See 4 crypto-related stocks now >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
58.com Inc. (WUBA) : Free Stock Analysis Report
Wal-Mart Stores, Inc. (WMT) : Free Stock Analysis Report
Twitter, Inc. (TWTR) : Free Stock Analysis Report
The Trade Desk Inc. (TTD) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
Tencent Holding Ltd. (TCEHY) : Free Stock Analysis Report
QuinStreet, Inc. (QNST) : Free Stock Analysis Report
PetMed Express, Inc. (PETS) : Free Stock Analysis Report
MercadoLibre, Inc. (MELI) : Free Stock Analysis Report
Groupon, Inc. (GRPN) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Facebook, Inc. (FB) : Free Stock Analysis Report
Cars.com Inc. (CARS) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Source : https://finance.yahoo.com/news/ecommerce-outlook-strong-holiday-season-224210442.html