Many financial advisors have clients asking about investing in Amazon.com Inc. (AMZN-Q) and other companies active in e-commerce, a fast-growing segment of the retail sector these days.
These e-commerce firms can fuel big returns, says Wilkie Kam, vice-president, senior investment advisor and associate portfolio manager with the Wilkie Kam Investment Advisory Team at BMO Nesbitt Burns Inc. in Vancouver. “All advisors should pay attention to e-commerce now more than ever.”
When shopping for investments, what are some of the key opportunities in this space?
Mr. Kam mentions three companies with very good growth rates and high growth expectations: Amazon; Ottawa-based Shopify Inc. (SHOP-T), which provides an e-commerce platform to retailers; and Alibaba Group Holding Ltd. (BABA-N), often called the “Chinese Amazon.”
These stocks’ trajectories also present challenges for advisors, as they have experienced tremendous price-appreciation in the past few years. That raises concerns about whether investors are paying too high a price for that growth.
“Many of the well-known companies in the e-commerce space are trading at a very high multiple,” Mr. Kam says.
Amazon trades at more than 70 times earnings. By comparison, the S&P 500 trades at about 22 times earnings, a high valuation for the broad-based index that’s likely at the tail end of the longest bull market in modern history.
That has influenced the approach some advisors take. The lofty entry price for many e-commerce companies is why Hardev Bains, president and portfolio manager at Lionridge Capital Management Inc. in Winnipeg, doesn’t hold any e-commerce-related stocks in clients’ portfolios.
“I have comfort that [Amazon, Shopify and Alibaba] are going to be around and dominate, but there’s no margin of safety in their price,” he says.
Mr. Bains adds that e-commerce has fundamentally changed retail, dividing it into two groups: "the disruptors” like Amazon and "the disrupted” like Walmart Inc. (WMT-N), Costco Wholesale Corporation (COST-Q) and Target Corp. (TGT-N).
These companies and other traditional bricks-and-mortar retailers such as Canadian Tire Corp. Ltd. (CTC-T) have expanded their e-commerce presence, but they still trail Amazon by a large margin. The Seattle-based e-commerce giant accounted for about 48 per cent of e-commerce sales in the United States in 2018, according to eMarketer, which tracks the sector.
Walmart has been mounting a successful challenge, surpassing Apple Inc. (AAPL-Q) last year as the second largest e-commerce company in the U.S, eMarketer data show. The retailing behemoth has spent billions expanding its online retail presence.
“If advisors don’t want to pay the premium on Amazon, they can look into Walmart,” Mr. Kam says.
However, Mr. Bains says that even Walmart’s share price is inflated in large part because of e-commerce hype.
Lionridge had held Walmart until recently but sold its stake. Mr. Bains says Walmart’s share price had reached an overvaluation point, while facing decreasing market share and margin compression partly from costs associated with expanding its e-commerce capabilities.
But while many e-commerce companies have high valuations, the segment’s annual sales growth is difficult to ignore. Per-quarter growth has consistently been in the low double-digit percentage points. Sales growth is forecasted at 20 per cent this year, exceeding US$3.5-trillion, eMarketer reports.
Although e-commerce’s annual growth rate is expected to slow to about 15 per cent in 2023, its share of all retail is predicted to grow to more than 22 per cent from about 14 per cent in 2019.
In Canada alone, e-commerce sales are expected to reach $98-billion annually by the end of 2022, eMarketer predicts.
“Today, $1 in every $10 spent in retail in Canada is done through e-commerce, and it’s only going to get higher,” says Paul Briggs, senior analyst at eMarketer.
He adds that Amazon will likely remain world’s largest e-commerce player for the foreseeable future because it largely built the market. The company continues to set the standard, now forging ahead with same-day delivery in major centres.
That puts pressure on competitors, yet it’s not just Amazon that’s reshaping retail, Briggs says.
“Shopify has also made a name for itself in terms of enabling e-commerce in many countries, levelling the playing field for small retailers that don’t have the dollars to invest in building an e-commerce channel,” Mr. Briggs says.
Mr. Kam cautions that picking stocks in this segment can be tricky, particularly given their high valuations. Alternatively, advisors can look to mutual funds such as Fidelity Global Innovators Class.
Although that particular fund doesn’t own Amazon, Mr. Kam notes many large-cap U.S. equity funds – core holdings in client portfolios – already own Amazon, Walmart, Apple and other large e-commerce players.
Another option is pursuing exchange-traded funds (ETFs) focused on e-commerce, such as Amplify Online Retail ETF (IBUY-Q). Lara Crigger, senior staff writer with ETF.com in New Orleans, says it’s the largest and longest running e-commerce ETF. Its share price has roughly doubled since its launch in 2016.
Ms. Crigger says there are other ETFs that short-sell bricks-and-mortar retailers. Among them is ProShares Decline of the Retail Store ETF (EMTY-A), “which isn’t explicitly e-commerce, but is an interesting take on the ‘retailpocalypse.’” The ETF increases in value when the shares of bricks-and-mortar retailers fall in price.
Stock-picking advisors can add high-flying e-commerce companies to clients’ portfolios because these stocks experience bouts of downside volatility, presenting buying opportunities, Mr. Kam says.
But Mr. Bains argues that the big names’ share prices would have to fall significantly to make them attractive. He says it would likely take a broad bear-market selloff in which companies across all sectors experience a decline of 20 per cent or more in their share prices.
“When you get into situations of throwing the babies out with the bathwater, that’s when we would look at owning these [e-commerce] firms,” he says. “That might not happen for a long time.”