Yahoo Finance Zacks Industry Outlook Highlights Groupon and JD.com
For Immediate Release
Chicago, IL – June 5, 2024 – Today, Zacks Equity Research discusses Groupon, Inc. GRPN and JD.com, Inc. JD.
Industry: E-commerce
Link: https://www.zacks.com/commentary/2283188/ecommerce-industry-prospects-bright-2-picks
This year is likely to be a good one for ecommerce, with the segment expected to take away big slices of the total retail pie. Commerce Department numbers for the last quarter is proof of this: ecommerce sales in the first quarter of 2024 grew 8.6% over 1Q23 (2.1% sequentially), with total retail sales increasing 1.5% (-0.1% sequentially). Ecommerce accounted for around 15.9% of total U.S. retail sales.
The convenience of online shopping remains the top reason for ecommerce volumes and this is particularly true of Gen-Z, which is, increasingly, the more relevant component of sales. Many of these buyers have grown up on the Internet and are accustomed to a high 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 revolves around digital influencers and appears to be expanding with more advanced technology such as AR/VR, social commerce and the Metaverse.
Valuation has improved over the past year, reflecting the stronger growth prospects. Several stocks in this extremely diverse industry are worth buying today, but we've picked two: Groupon and JD.
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 and/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 good customer service and more shipping options, which generally tip the scales in favor of larger players. Particularly so, because there is fierce price competition necessitating deep discounting in many cases.
Current Trends Driving the Internet-Commerce Industry:
The total retail experience between physical and digital continues to blur as most consumers blend their online and offline activities. This usually takes the forms of research online and buy in-store or buy online and pick up in-store. Since convenience is the main requirement, any experience that increases the speed of delivery/pickup is likely to be preferred. This may entail increased reliance on robots, self-driven delivery vehicles and drones that could ease bottlenecks and make deliveries smoother and cheaper. Therefore, it isn't just the online-first retailers that are building a physical presence but also those that have traditionally been physical retailers that are digitizing to various degrees, or getting themselves a digital store-front.
Another notable trend is a subscription format for repeat-use items. This makes it easier for the consumer to order and for the retailer to plan. Retailers usually offer some kind of discount to consumers choosing this option, which makes it all the more attractive. The trend is expected to expand going forward as both tangible and intangible commodities and low-value and high-value items are increasingly sold 'as-a-service.'
Direct access to the consumer is something that no retailer can afford to pass up because this is the only way to acquire customer data. Since some of the larger companies are already providing services based on customer data (such as Amazon's buyer review summary), buyers are getting used to these services. Because of the many details involved in satisfying a customer, data mining has grown in importance over the years, with the party controlling the customer's data being best positioned to identify and service demand while also delivering 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 customer data, they can create programs and processes to maximize customer satisfaction, drive sales and minimize returns. Artificial intelligence, as used by companies like Amazon, already decides how competitive a player is. So harnessing big data has become imperative for survival.
Themacroeconomic situation continues to evolve, although we can probably say with a certain amount of confidence that there won't be a recession this year. On the other hand, rate cuts appear to be on the horizon, especially considering that elections are around the corner. Although today's consumer is thrifty, the easing of pressure on their disposable incomes can only be a good thing. For producers, supply chain issues have alleviated to a great extent while the labor situation is still tight. Global uncertainties continue to affect foreign exchange effects for companies with international operations. At the same time, there are chances of rate cuts this year, which will ease the pressure on both producers and consumers, making this a positive for the industry this year (especially considering the back-half loaded sales it typically has). 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.
A trend that Gen-Z is popularizing is social commerce. Social commerce means the ability to discover, research, buy and checkout on a social media platform, often and increasingly more so, through influencers. 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 first became 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 very popular. According to The Future of Commerce -- a website on ecommerce trends -- 96.9 million Americans shop directly on social media. Since 83% of the Gen Z start their shopping on social media, its clear where this trend is headed. According to this report, social commerce will account for $2.9 trillion.
Zacks Industry Rank Indicates Strength
The Zacks Internet - Commerce Industry is a rather large group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rank of #62, which places it in the top 25% 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 positive near-term prospects.
Ecommerce being in the top 50% of 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 2024 is up 51.3% and for 2025 up 34.1%. Given the rate cuts expected this year, things look set for a strong second half.
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 Generates Strong Shareholder Returns
Over the past year, the Zacks Electronic - Commerce Industry has been traded at a premium to both the broader Retail and Wholesale sector and the S&P 500.
The stocks in this industry have collectively gained 34.9% over the past year, compared to the 37.6% gain for the broader Zacks Retail and Wholesale Sector and the 23.5% gain for the S&P 500.
Current Valuation Attractive
Historically, the industry has always traded at a premium to the industry as well as the S&P 500. Its current price-to-forward 12 months' earnings (P/E) of 22.63X represents the narrowest premium in the last five years over the S&P 500 and the broader retail sector, which are currently trading at 20.9X and 21.46X, respectively. Also attractive is the fact that it is trading at a discount to its own median level of 26.8X over the past year.
Forward 12 Month Price-to-Earnings (P/E) Ratio
2 Stocks Worth Considering
The improving prospects and attractive valuation indicate that there are a number of stocks currently worth picking. Especially because of the significant variety that exists in this industry in terms of lines of business, business model, location and so forth, choosing can be tricky. We have used our proprietary ranking system to pick 2 stocks that appear attractive today.
Groupon, Inc.: Chicago-based Groupon offers a B2C marketplace, including a focus on deals. Its mobile application and website groupon.com covers three primary categories: Local (merchandise and local events), Goods (third-party merchandise) and Travel (accommodations, air tickets and packages for domestic and international destinations). The company generates Service revenues (through commission as well as advertising) from these three categories. North America accounted for nearly 74% of revenue last year with International bringing in the balance.
Mobile commerce is a big driver for the company, which has recently transitioned from a deals site to a full-fledged marketplace. It has harnessed AI across the business, making life easier for both buyers and sellers and continues to take out costs to align with the new structure. With sales returning to growth (after eight years) in the last quarter, there is reason to believe that the current momentum will continue.
The optimism is reflected in analyst estimates, which grew 3 cents (150%) for 2024 and 8 cents (32%) for 2025 in the last 60 days. Analyst estimates represent EPS growth of 109.6% in 2024 and 560% in 2025.
The shares of this Zacks Rank #1 (Strong Buy) company are up 164.9% over the past year.
JD.com, Inc.: Beijing, China-based JD offers ecommerce platforms, along with associated logistics, real estate, asset management services, storage and other management services in China. Although its range of electronic goods is extensive, it also offers general merchandise, healthcare and industrial supplies. It also supplies data, technology and other solutions facilitating the digitization of enterprises.
The company continues to generate revenue and earnings growth on the back of its general merchandise category, which benefited from the recovery in supermarkets. Its broad selection, competitive pricing and good customer service no doubt helped. The strong momentum in the business is likely to ensure steady payouts to investors in the form of both dividends and share repurchases.
In the last 60 days, the Zacks Consensus Estimate for 2024 has increased 19 cents (6.1%). For 2025, it is up 9 cents (2.5%). Analysts expect earnings growth of 6.7% in 2024 and 8.9% in 2025.
The Zacks Rank #1 stock is down 17.6% over the past year.
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