Tim Knapton: What to buy in e-commerce, the hottest sector of the global economy
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The video headline may be racy but there is no sector that’s grown faster and evolved more in the last 25 years than e-commerce.
In 1996, indeed, the fledgling e-tailing industry was barely worth $US1bn ($1.5bn) globally and that’s now approaching $US40 trillion!
And four of the world’s 10 largest companies are primarily driven by e commerce – Amazon, Alibaba, Visa and Tencent.
Despite all that, on a global basis the ecommerce penetration ratio (of total retail sales) is still only 16 per cent.
Prior to COVID-19, e-commerce was growing at low double digit rates and obviously the enduring socioeconomic impact of the virus will now accelerate that.
The sector’s existing core drivers will all remain intact, if not intensify; and we’re talking about:
- Growth in mobile internet usage – two thirds of the global population have access to cookie laden m-sites with high usability;
- The emergence of sophisticated players in third party logistics;
- A proliferation of online payments providers and e-wallet adoption; and
- Better and more ubiquitous search algorithms, and advances in data analytics and CX.
Growth has also been augmented by the innovative business models of leading players, which typically offer frictionless user interaction and deploy sophisticated omni-channel marketing strategies that can embrace online, social media and mobile, and be integrated with digital affiliate and physical store or pop-up networks.
Amazon alone spends over $US20bn on R&D.
Its Echo Look device is enabled by its Alexa AI to take an image of an outfit and email it to Amazon’s Style Check tool for a second opinion based on machine learning algorithms. It may sound a bit big brotherish but clearly it’s a reflection of how digital society is evolving.
Another seismic force is the migration online of traditional retailing giants. With over 2000 large stores, Euro retailer Zara has aggressively built a web presence, backed by a global portfolio of state of the art online stockrooms for rapid delivery.
And although we like to consider ourselves early tech adopters, the e-commerce penetration rate down under is only just reaching 10 per cent.
That’s only partly explained by our geographically disperse population and our distance from overseas suppliers. So it can and will rise.
Frustratingly, though, we are also short of quality listed players so those that enjoy category leadership will surely regain high valuation premia.
Examples are:
Temple and Webster (ASX:TPW) – a clear leader in the online furniture sector and in the first half it grew revenues by 50 per cent, which furthered its transition into positive EBITDA.
The stock is down 20 per cent since the late February high but its segment is still very immature, with a penetration rate of about 5 per cent in domestic furniture and less than 1 per cent in commercial furniture.
The company has significant scope for growth in terms of building our overall customer base, the active component, average repeat purchase frequency and product range.
Domino’s Pizza Enterprises (ASX:DMP) is down slightly more, 25 per cent, from its previous high and that’s brought the company back to a revenue multiple of less than 1x and an EBITDA multiple of about 16x.
In the medium term those ratios will prove modest because this is a $5bn clicks and mortar business, where the online component is already over 40 per cent and there’s ample scope for growth within and beyond its existing nine-country foot print.
For those who didn’t see our previous video, it’s worth mentioning home made meal delivery provider Marley Spoon (ASX:MMM) again.
Although the stock’s up over 80 per cent in the two weeks since then, there is still considerable upside given it’s trading on a prospective revenue multiple of about 0.7x, is transitioning into profitability and has such powerful channel partners here and in the US.
Among emerging players to watch are:
Online IT and consumer electronics provider Harris Technology Group (ASX:HT8), which already reported a 48 per cent boost in March quarter revenues due to rapid growth in home office and home schooling activity.
The company has since opportunistically released a range of facemasks, hand sanitisers and alcohol wipes.
And Digital Wine Ventures (ASX:DW8) which is rolling out WineDepot, an innovative cloud-based platform to optimise the supply chain of Australia’s highly fragmented wine industry.
The company has a potent logistics alliance with Australia Post and its roll out has been prioritised away from business-to-business (B2B) toward business-to-consumer (B2C), where there is obvious upside at the moment.
So e-commerce is a gigantic sector being driven by gigantic players and so it’s a case of a rising tide lifting all boats. But investors should focus on players like those we just mentioned that are already demonstrating strong revenue growth.
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