In my April 2020 blog, “Where to buy the future,” I encouraged investors to consider buying well-positioned technology companies at potentially bargain-basement prices. With two-thirds of the year now behind us, I’d like to share my latest thinking on the e-commerce industry in the wake of its (unsurprisingly) lights-out performance amid COVID-19-induced fears and economic shutdowns.
Broadly speaking, I think e-commerce names should continue to post solid sales growth through 2020, but then fall short of analysts’ and investors’ expectations in 2021. And for this to be the case, I don’t necessarily think we need to have a COVID vaccine or a large-scale economic reopening in place.
Strong e-commerce growth in 2020
Globally, e-commerce growth accelerated rapidly when consumers hunkered down en masse during the first quarter of 2020. Basically, anyone who could buy online did just that (or so it seemed).
By my math, e-commerce in North America is growing upwards of 40% today. In the US, e-commerce has gone from ~15% of 2019 retail sales in the relevant categories to now be on track for 22% – 24% this year, bucking its typical pattern of adding one or two percentage points a year. (I use North America because we have cleaner data, but it’s directionally consistent with most developed markets.)
A key question going forward is: Can e-commerce companies as a group continue to “crush” the numbers, as in beat analysts’ growth estimates? In the very near term, I would say yes. With e-commerce in the US still going strong, the big domestic names in particular should be able to sustain momentum through at least the third quarter of 2020.
Moving into next year, I am less sanguine because the growth estimates appear to me to be too high as of this writing. I think sequential growth in e-commerce is likely to decelerate and perhaps even go negative in 2021, especially if an improved COVID situation by then emboldens more shoppers to return to brick-and-mortar stores.
By 2022, the world should (hopefully) have regained a greater semblance of normalcy, allowing the longer-term drivers of e-commerce — secular forces like shifting demographics, increased efficiencies of online shopping, and growing product selection — to kick back in.
The advertising angle
Another angle I’m working on is the considerable leverage that many e-commerce companies have reaped from falling digital advertising costs recently. The two main catalysts are: 1) surging demand, which has enabled these companies to either lean back from marketing spend or continue spending at much higher return on investment (ROI); and 2) declining CPM (cost per thousand “impressions”). Both may reverse as e-commerce growth begins to slow next year, potentially delivering a 2021 boost to the advertising-centric industry players.
Taking all of this together, while the long-term trend toward e-commerce is not going away, I would expect many of these stocks to disappoint investors as we head into 2021 and their growth “misses” come into focus. (For now, however, the market remains focused on the near term, when the companies will likely keep “crushing” numbers.) At the same time, I see some opportunities in companies poised to benefit from rising advertising spend in the period ahead.