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
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 15.8% in 2012 to reach $225.5 billion.
Total retail e-commerce was 5.8% of total retail sales in the
second quarter of 2013, up slightly from 5.5% in the first quarter,
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.
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
In fact, trends indicate that consumers prefer mobile browsers when
shopping, searching and entertaining themselves, while preferring
apps for navigation and acquiring information. Call this
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 this year. The
firm estimates that mobile represented 10% of total ecommerce sales
for the first half of 2013.
eMarketer expects m-commerce to increase as a percentage of
total ecommerce, with strong holiday sales this year taking its
share of total ecommerce sales to 16%, or $41.7 billion (previous
forecast was 15%, or $38.8 billion). This share is expected to go
up to 26% in 2017 ($113.6 billion).
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 will generate 65% of m-commerce sales this year, with
smartphones accounting for the rest.
While smartphones are extremely convenient when on the move,
tablets have several advantages of their own. 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
Overall retail trade through smartphones and tablets grew 81% in
2012 and is expected to grow over 55% in 2013 (eMarketer Jan 2013).
While growth rates will come down thereafter, they will remain in
the strong double-digits range. At any rate, the inherent cost
savings and convenience of "showrooming" ensures that the trend
advancements in technology
are improving navigation and customer experience on ecommerce
sites, which is improving reviews and thus drawing more traffic to
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
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.
remains a major lure.
The 10 hottest individual product categories in ecommerce are
women's apparel, books, computer hardware, computer software,
apparel, toys/video games, video DVDs, health and beauty, consumer
electronics and music.
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
) 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
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
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
sales in the U.S. grew 34% in 2012, following triple-digit growth
in the four preceding years. With a penetration of just 16%, 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.
) are the primary channels facilitating international expansion,
Barnes & Noble
), 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
) sites remained the forerunner facilitating online video
consumption, with significantly higher unique viewers (UVs) than
any of the others.
), which has moved up the ranks pretty fast, maintained the second
position. AOL Media Network,
) and NDN sites took the next two positions, with VEVO (in which
Google's YouTube recently acquired a stake) coming in at number
six. AOL topped the list as far as ads viewed were concerned
(helped by the Adap.tv acquisition) with Google close on its heels.
[comScore estimates, Oct 2013]
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
has grown greatly since Apple announced its first iPod. Amazon and
others are also seeing their business grow. Nielsen estimates that
in 2012, U.S. digital album sales increased 14%, with tracks up 5%
and overall music shipments at an all-time high of 1.65
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 increasingly available
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 from Sony and Xbox from Microsoft will also help sales this
Since video, games and music are often social activities, they are
increasingly being marketed on social platforms such as Facebook
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
According to recent research from comScore, Facebook led the social
networking space in Dec 2012, with 83% of total time spent on
social networking platforms, followed by Tumblr, Pinterest,
) and others. However, Pinterest and Instagram are growing in
popularity, going by the strong growth in unique visitors. A more
recent ranking from eBizMBA places Facebook in the first position
with the highest number of unique monthly visitors, followed by
Twitter, LinkedIn, Pinterest and MySpace. Despite recent growth,
Google+ didn't make it to the top 5.
is also helping retail.
) 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
Forecast for 2013
U.S. e-commerce spending is expected to increase 13.4% this year to
touch $262 billion, according to a recent report from Forrester.
Online spending (excluding travel) will increase at a 10% CAGR to
reach $370 billion by 2017. Western Europe is expected to increase
14.3% this year and grow at a CAGR of 11% to 2017.
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
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
Therefore, Internet Commerce and Internet Services - Delivery being
in the 32nd and 95th positions, respectively are in positive
territory, with Internet Services (166th position) being neutral.
So it is not surprising that the average rank of stocks in the
Internet Commerce industry is 2.65, for Internet Services -
Delivery, it is 2.94, while for Internet Services it is 3.06.
[Note: Zacks Rank #1 denotes Strong Buy, #2 is Buy, #3 means Hold,
#4 Sell and #5 Strong Sell].
The broader Retail/Wholesale sector, of which Internet Commerce is
a part, is not expected to do too well in the third quarter,
considering the fact that both the estimated revenue and earnings
beat ratios are 38.9%. The calculated earnings beat ratio based on
companies that have reported thus far is just slightly higher at
Total earnings for the sector are estimated to increase 4.9% in the
third quarter on revenue growth of 3.8%, indicating escalating
costs and sluggish growth. This contrasts with an earnings growth
of 9.3% on a revenue base of 6.9% in the preceding quarter.
The other companies we are discussing in the e-commerce outlook
(Part 2) fall under the broader Technology sector. Here we estimate
a fairly strong earnings beat ratio of 71.2%, partially supported
by a revenue beat ratio of 57.7%.
While the estimated revenue beat ratio is consistent with the
57.7% in the previous quarter, the estimated earnings beat ratio is
lower than the 75.0% calculated for the second quarter. The
earnings beat ratio of companies that have reported thus far is
76.5%, better than the estimated numbers.
Total earnings in the sector were up 4.0% year over year compared
to a 9.6% decline in the second quarter. Total revenues did
slightly better, increasing 2.4% from last year, up from 0.6% in
the second quarter.
Earnings estimates for 2013 and 2014 indicate better growth
prospects in both years for Retail/Wholesale. Technology is
expected to be even stronger.
comScore estimates that Amazon remains the leading Internet
retailer based on unique visitors (UVs) in the second quarter,
), in that order. The top 3 have a much higher penetration on both
Android and iOS platforms.
When discussing opportunities, a couple of stocks stand out. The
), which is seeing positive momentum in the business due to
better-than-expected subscriber additions, particularly in
international markets. The longer-term growth prospects are also
improving because of its growing library of original content.
Of course, it does have its own share of problems, such as the high
content acquisition costs and the possibility of broadband
suppliers moving to a usage-based tariff plan. But the positives
outweigh the negatives at this point and estimates are trending up
as a result.
We also see estimates for
) 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.
Because of the gradual receding of boundaries between online and
physical store retailers, traditional retailers are increasingly
entering the space.
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.
Amazon has pulled ahead of the pack with its international push.
The company spent a good part of 2011 as well as most of 2012
setting up its international fulfillment centers and is now poised
to benefit from it. It has also been launching its Kindle platform
in some of these markets to spur digital sales. But Amazon has a
very aggressive pricing policy in an attempt to pick up market
share. This is taking a toll on its profitability.
eBay is still playing catch-up in the retail segment, but is way
ahead of others in the payment segment. eBay's recent push to grow
its international business means the company is moving in the right
direction. It has already strengthened its position in India, tied
up with weaker players in China and set up a think tank in Russia.
But the company may be expected to continue investing in the
business, which may impact near-term returns to shareholders.
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