e-Commerce Stock Update - March 2014 (pt. 1) - Industry Outlook

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The Electronic Commerce, or e-commerce industry is one of the most progressive sectors of the economy. The industry is evolving very rapidly, so data collection and evaluation are particularly difficult. Consequently, one has to rely largely on surveys by both government and private agencies.

According to the U.S. Census Bureau, the manufacturing sector is the largest contributor to e-commerce sales (49.3% of their total shipments), followed by merchant wholesalers (24.3% of their total sales). These two segments make up the business-to-business category.

Retailers and service providers generated just 4.7% and 3.0%, respectively of their revenues online, a slightly higher percentage than they were in the prior year. The Bureau categorizes these two segments as business-to-consumer.

This places the business-to-business category at 89% of total ecommerce sales, with the balance coming from the business-to-consumer category. The latest numbers from the Bureau suggest that the fastest-growing segments were retail and wholesale. [All the above data from the U.S. Census Bureau relate to 2011, as published in May 2013].

The U.S. Commerce Department estimates that ecommerce sales in the country grew 16.9% in 2013 to reach $263.3 billion.

Retail

Total retail e-commerce grew 3.4% sequentially and 16.0% year over year to 6% of total retail sales in the fourth quarter of 2013, according to the quarterly retail trade survey by the Census Bureau. Forrester Research estimates that this share will go up to 10% by 2017.

comScore data (as compiled in the table below) indicates that this segment recovered very quickly from the economic downturn and continued to grow at an accelerated rate over the last few years.



Key Drivers

Since the industry is in evolution, the drivers are changing. For instance, the initial push came from the time savings and convenience of online transactions. To this were added the benefits of comparison shopping and personal recommendations. As technology required for personalized recommendations developed, became more available and its benefits more evident, most e-tailers started adding the feature until it is now considered a must-have.

Today, the biggest driver of growth in the industry is the adoption of smartphones, tablets and other mobile Internet devices. In fact, trends indicate that consumers prefer mobile browsers when shopping, searching and entertaining themselves, while preferring apps for navigation and acquiring information.

comScore sees global mobile Internet users increasing very rapidly, with mobile as a percentage of total ecommerce sales (excluding travel) going from 11% in 2012 to 15% by the end of 2013. This share is expected to go up to 26% in 2017.

Smartphones and tablets accounted for 6.0% and 3.5% of total ecommerce sales in the first half of the year, according to comScore, with event tickets and apparel and accessories being the most popular items on mobile devices. eMarketer estimates that tablets generated 65% of m-commerce sales in 2013, with smartphones accounting for the rest.

While both tablets and smartphones are extremely convenient when on the move, tablets have several additional advantages. In fact they are a boon to the ecommerce industry, since the larger screens offer better visibility of online stores and merchandise, thus facilitating purchases.

Average spending per user on tablets is therefore 20% higher than on smartphones but since more people have smartphones, their overall share of ecommerce spending is lower. Given the unique advantages of smartphones and tablets, it appears that they are working in conjunction to boost total online retail sales. Additionally, the inherent cost savings and convenience of "showrooming" ensures that the trend will continue.  

Continued advancements in technology are improving navigation and customer experience on ecommerce sites, which is improving reviews and thus drawing more traffic to the sites.

The digital consumption of books, music, video and games all over the world is extending the reach of these goods and thereby boosting sales. Therefore, previously unconnected electronic goods, such as TVs and game consoles are now being modified to enable connectivity. On the other side of the fence, online versions of books, music, video and games that can be downloaded and consumed on a traditional computer or any other connected device are becoming available.

Since the shift in consumption patterns is resulting in multi-functional electronic gadgets that are no longer optimized for a particular activity, there is a great drive to develop technologies that could improve the quality of each experience.

Free shipping remains a major lure.

Top-Selling Items

The 10 hottest individual product categories are women's apparel, books, computer hardware, computer software, apparel, toys/video games, video DVDs, health and beauty, consumer electronics and music.

Apparel is a huge market and although online sales are currently under 10% of total apparel sales, the category already generates the most dollars. Selling tools, such as zoom, color swatching and configurators are helping the process. Even primarily brick-and-mortar outfits like Macy's ( M ) sees that consumers purchasing through multiple channels (online and offline stores) tend to spend more.

This is encouraging traditional retailers to offer an online store to supplement their physical stores. Online sales also show better conversions since searches usually draw consumers with a prior intention to purchase. eMarketer estimates that apparel will be the fastest-growing category over the next few years, making up around 20% of total retail ecommerce sales by 2016.

The increase in technology purchases over the Internet is driven by not only individual consumers, but also companies and governments. The efficient and timely processing of orders, choice of payment options, subscription-selling and sales under the SaaS model are all facilitators. eMarketer estimates that online sales of consumer electronics goods will nearly double over the next four years to touch $80.2 billion by 2016.

The Association of American Publishers says that ebook sales in the U.S. grew 34% in 2012, following triple-digit growth in the four preceding years. Growth trends in 2013 according to last-available reports indicate tough comps for the children's category that are offsetting increases in adult and religious categories. With a penetration rate in the mid-teens percentage range, scope for market expansion is present.

However, the shift in preference from e-readers to tablets that offer other forms of entertainment, such as movies, games, songs and so on, is a deterrent (a Bowker Market Research survey and wsj.com). U.S. players continue to see strength in international markets. Amazon ( AMZN ) and Apple ( AAPL ) are the primary channels facilitating international expansion, although other smaller players and local companies in international markets are also playing a part.

Nearly 87% of the Internet-using audience in the U.S. watched videos in December. Google ( GOOG ) sites remained the forerunner facilitating online video consumption, with significantly higher unique viewers (UVs) than any of the others. Facebook ( FB ), which has moved up the ranks pretty fast (helped by 6-second Vine videos and auto-load videos), maintained the second position. AOL Media Network, Yahoo sites, NDN sites and Amazon sites took the next few positions, with VEVO (in which Google's YouTube recently acquired a stake) coming in at number seven. AOL topped the list as far as ads viewed were concerned (helped by the Adap.tv acquisition) with Liverail and Google coming in second and third. [comScore estimates, Jan 2014]

The Cisco VNI initiative has forecast global consumer Internet video traffic to increase from 57% of total consumer Internet traffic in 2012 to 69% in 2017, with Internet TV increasing 5X by then and VoD tripling. This represents tremendous opportunity in terms of video content sales and ad revenues.

The digital consumption of music has seen huge growth since Apple announced its first iPod. Amazon and others are also seeing their business grow. In 2013 however, digital track sales declined around 6% while digital album sales stayed flat (Nielsen). The decline is attributable to streaming services, such as YouTube and Spotify, which saw volumes increase 32%. A recent IFPI report shows that digital music could finally bring a turnaround in the music business, which has been in the doldrums for many years. While piracy remains a major concern, licensed and ad supported music services are growing in popularity.  

The gaming segment has suffered over the last few quarters, impacted by the economic slowdown that affected consumer spending. However, while this affected total gaming spend, it did not affect the online segment, which gained from the increasing digitization of games, the desire to play across multiple platforms and the availability of free-to-play games to draw customers.

As a result, sales through online channels continue to grow at the expense of traditional retail. The release of the new Play Station 4 from Sony and Xbox One from Microsoft are also helping sales right now.

Since video, games and music are often social activities, they are increasingly being marketed on social platforms such as Facebook and Pinterest.

Facebook's SocialStore, as it is called uses MarketLive's Intelligent Commerce Platform that enables marketers to display product information, promotions/discounts, shopping carts and check-out options. Both comparative shopping and comparative pricing are possible. The basic advantages of the system that are currently being touted are that it allows easy brand building, creates meaningful commercial relationships and makes use of account-holders' social connections to attract new buyers.

An E-tailing Group study reveals that of 100 U.S. consumer product merchants with e-commerce websites surveyed, 98 had a Facebook account. Around 90% of these redirected the user to the merchant's own page, 96% had loaded brand-building videos, 56% had product-oriented videos, 44% had store locators and 38% had promotions.

Facebook remains the leader by far in the social networking space, with monthly average users that are significantly higher than other networks such as Tumblr, Pinterest, Twitter, LinkedIn and Others. Its recent acquisition of WhatsApp ensures that user growth will remain very strong, despite the strength at peers. Engagement on Facebook also compares favorably with its peers.

Selling discount coupons is also helping retail. Groupon ( GRPN ) is the leader here, which along with its closest rival LivingSocial offer discount coupons with a very low shelf life from local players looking for sales. The company offers huge discounts to attract buyers and collects a percentage of the sales thus generated. This kind of business is very competitive, since it has very low barriers to entry.

As a result, not just Amazon and Google, but also a host of other much smaller parties have started doing some business in this format. Technology investments are also required in order to serve customer needs effectively. Considering the prospects, we don't see the platform as a major contributor to e-commerce sales in the near term.

Forecast for 2013

A recent report from Forrester indicates that online spending (excluding travel) will increase at a 10% CAGR to reach $370 billion by 2017. Western Europe is expected to grow at a CAGR of 11% to 2017. The Asia/Pacific region will emerge as the largest ecommerce market this year, pushing ahead of North America for the first time.

Since ecommerce entails the buying and selling of goods or services over electronic systems, it includes companies that are totally dependent on these sales, those that are gradually moving to it, as well as those that want to use it partially. Therefore, the biggest sellers or the ones growing the strongest are not necessarily those that are solely dependent on the Internet. The following diagrams seek to explain the position of companies primarily dependent on the Internet for the distribution of their goods and services in the context of the Zacks Industry Rank .

Two (Retail/Wholesale and Computer & Technology) of the 16 broad Zacks sectors are related to the ecommerce industry as depicted below.



We rank the 264 industries across the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank .

The outlook for industries positioned at #88 or lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

Therefore, Internet Services - Delivery and Internet Commerce being in the 212th and 233rd positions, respectively are in negative territory, with Internet Services (102nd position) being neutral.

So it is not surprising that the average rank of stocks in the Internet Services - Delivery industry is 3.29, for Internet Commerce, it is 3.37, while for Internet Services it is 3.00. [Note: Zacks Rank #1 denotes Strong Buy, #2 is Buy, #3 means Hold, #4 Sell and #5 Strong Sell].

Earnings Trends

The broader Retail/Wholesale sector, of which Internet Commerce is a part, should have a moderate quarter. With roughly half the companies having reported thus far, the earnings beat ratio is 56.5% although the revenue beat ratio is much lower at 30.1%.

Total earnings for the sector have increased 0.3% in the fourth quarter on revenue growth of 3.9%. This contrasts with an earnings growth of 10.3% based on revenue growth of 3.8% in the preceding quarter. This seems to indicate heavy discounts typical of the holiday season.

The other companies we are discussing in the e-commerce outlook (Part 2) fall under the broader Technology sector. Here we see a fairly strong earnings beat ratio of 86.7%, supported by a revenue beat ratio of 73.3%.

Total earnings in the sector were up 5.3% year over year similar to the 5.6% increase in the third quarter. Total revenues increased 5.2% from last year, up from 3.2% in the third quarter. The trend appears positive.

Earnings estimates for 2013 and 2014 indicate better growth prospects in both years for Retail/Wholesale and Technology.

Market Position

comScore estimates that Amazon remains the leading Internet retailer based on unique visitors (UVs) in Dec 2013, followed by eBay ( EBAY ), Wal-Mart Stores ( WMT ), Target Corp. ( TGT ), Apple and Best Buy ( BBY ), in that order. The top 3 have a much higher penetration on both Android and iOS platforms.

OPPORTUNITIES

Opportunities are hard to come by considering the way the sector is doing now. There are huge growth prospects, so companies are mostly in the investment mode. Naturally, at this stage there are execution risks, or at least some uncertainty regarding the time by which investments will bear fruit.

In this environment, Priceline.com ( PCLN ) is one of the few stocks with some momentum. The company reported solid results and looks set to ride the growth wave.

We also see estimates for Autobytel ( ABTL ) going up, attributable to a refocusing of its business and a demonstrated ability to deliver a solid lead generation business. The company has not done too well in the last few years due to its dependence on macro factors particularly with respect to the automotive industry. It also needed to trim its operating structure. With this out of the way, Autobytel should be able to generate steadier returns.

WEAKNESSES

Nearly all the Internet retailers have issues at present. That's because Internet retailing requires proper fulfillment and a solid technology platform to be successful and both these factors become difficult as the companies grow.

Moreover, the pursuit of growth in international markets is an absolute necessity, because stealing business from traditional retailers can only take them so far. Besides, traditional retailers have become wiser and many have developed their own e-tailing platform.

Generally, estimates have been coming down for a large number of companies, mostly because of execution uncertainties related to their investments. Some of these that we would like to caution against include Amazon.com, eBay, Blue Nile ( NILE ) and Autobytel.

APPLE INC (AAPL): Free Stock Analysis Report

AUTOBYTEL INC (ABTL): Free Stock Analysis Report

AMAZON.COM INC (AMZN): Free Stock Analysis Report

BEST BUY (BBY): Free Stock Analysis Report

EBAY INC (EBAY): Free Stock Analysis Report

FACEBOOK INC-A (FB): Free Stock Analysis Report

GOOGLE INC-CL A (GOOG): Free Stock Analysis Report

MACYS INC (M): Free Stock Analysis Report

BLUE NILE INC (NILE): Free Stock Analysis Report

PRICELINE.COM (PCLN): Free Stock Analysis Report

TARGET CORP (TGT): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Investing Ideas , Stocks

Referenced Stocks: AAPL , ABTL , AMZN , BBY , EBAY

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