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Zacks Industry Outlook Highlights: Apple, Alphabet, Facebook and Twitter

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For Immediate Release

Chicago, IL - February 20, 2018 - Today, Zacks Equity Research discusses the Ecommerce, including Apple AAPL , Alphabet GOOGL , Facebook FB andTwitter TWTR .

Industry: Ecommerce

Link: https://www.zacks.com/commentary/149608/ecommerce-outlook-strong-holiday-season-launches-a-great-2018

Ecommerce, i.e. the most growth-oriented part of the retail industry, doesn't operate exactly like its brick-and-mortar counterpart. While goods and services do change hands, there's a completely different infrastructure involved, whether it's the marketplace, or logistics, or payments system, or ancillary services. That's because each of these things is necessarily driven by technology.

The recent past has, however, seen traditional retailers like Wal-Mart investing increasing amounts in building this technological infrastructure even as Amazon takes an increasing interest in brick-and-mortar operations to drive efficiencies in its delivery system.

Retail ecommerce is also unique because a single company (Amazon) accounts for the largest chunk of it, is the major trend-setter and the greatest influencer on the entire industry, at least in the U.S. While new players are emerging, it won't be easy to unseat Amazon simply because of its size, experience, prices and loyalty program.

So it's only a company like Wal-Mart, which has similar resources and huge experience that can hope to truly challenge the ecommerce leader. And that's still a work in progress because Wal-Mart, while reporting strong ecommerce growth and offering attractive growth projections, still isn't statutorily required to say how much the business contributes.

The other major point of difference is the fact that unlike traditional retail it's relatively easy for an advertiser or other Internet service provider to also get involved in the retail process and thereby siphon off some of the profits.

The Strongest Holiday Season Ever

The holiday season is the biggest for all retailers, and electronically-enabled commerce is no different. 2017 was a particularly strong year for the job market, marking 86 consecutive months of job growth and the lowest unemployment rate since 2000. As a result, consumer confidence was also at its peak. To top it all, the recent tax reform bill has raised expectations of higher wages and bonuses. Consumer spending numbers reflect the positive sentiment.

The National Retail Federation has said that total holiday spending, including physical and online sales, grew 5.5% in 2017, the biggest jump in 12 years.

According to Mastercard SpendingPulse, holiday retail sales between Nov 1 and Dec 24 grew 4.9% from last year, the biggest jump since 2011 that Mastercard has tracked. Mastercard estimates are based on sales activity in Mastercard's own payment network and survey-based estimates for payment forms it doesn't track directly, such as cash and check.Electronics and appliances were the most popular category, with sales growing 7.5%. Online sales grew 18.1% as more retailers adopted online channels.

According to Adobe Analytics, which measures 80% of all online transactions from the top 100 U.S. web retailers, U.S. shoppers spent a record $108 billion this holiday season, up 14.7% from last year.Mobile platforms made up 52% of traffic to retail websites and a third of all online spending. Cyber Monday, on which $6.6 billion was spent, was the biggest U.S. shopping day ever, driven by electronics goods like Nintendo's Switch gaming console, Google's Chromecast, Roku, Hatchimals and Colleggtibles toys, and Amazon's Echo speaker.

According to Slice Intelligence, there were 12% more buyers this year than last year, with average spending per buyer up by $62.03.Amazon accounted for 38% of online holiday sales, with Best Buy a distant second at a mere 4%. Amazon increased its share by half a percentage point, while Target increased by 0.6%. Amazon's biggest month is no longer in the holiday season but in July, when its Prime Day enabled it to command a 41.7% market share.

The two biggest shopping days were Black Friday and Cyber Monday, which accounted for 4.7% and 4.8% of the 61-day holiday season, respectively. The data was collected from a panel of 5 million online shoppers.

According to Salesforce, 46% of all online orders on Thanksgiving Day and 50% of all orders on Christmas Day were placed from a mobile device. Mobile shopping saw its biggest increase on Christmas Day.

According to NetElixir, search marketers saw a 19.4% increase in average order values (AOV), with conversions up 15.6%, impressions up 12.8% and the average cost per click up 14.2%.

To sum up, certain predictions from market research firms held up: that overall retail would strengthen from last year, that traditional retail would also strengthen and that ecommerce would continue to grow much stronger than traditional retail. But overall results were even stronger than market researchers expected.

Ecommerce Industry at a Glance

The following diagrams seek to define the broad spectrum of companies primarily dependent on the Internet for the distribution of their goods and services , as well as companies that enable these exchanges:

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 - Services and Internet Services - Delivery and 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.

Market Trends

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

Ø 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, Alphabet, 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.

Ø 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 and Twitter for example will start playing a bigger role. Others like Pinterest are already travelling this path.

Ø 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.

Ø 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.

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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 Nasdaq, Inc.


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

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