The rise of e-commerce has been well documented, but as companies report their ‘pandemic-driven’ earnings this week, is this business model our best bet?
If I had a time machine I would happily go back to March 19 of 2020 and put all my money into Wayfair (NYSE: W). Absolutely crushed by the first wave of coronavirus-induced sell-off, Wayfair stock sank to five-year lows of $23.52 per share. Fast forward six weeks though and this furniture and home-goods champion has skyrocketed almost 700%, jumping 23.69% in a single day after its May 4 earnings call.
It must have been one whopper of a quarter you’d imagine? Well, not exactly. Revenue did rise 19.8% year-on-year to $2.33 billion, and gross profit rose a sharper 23.1% to $579.1 million. However, operating costs for Q1 were much higher than gross profit, coming in at $841.2 million, giving it an operating loss of $284 million. Its operating cash burn also rose sharply — over 215% — to $256.3 million in the period.
So not really the best quarter ever. But why is the stock on such a rampage then? One hyphenated word:
E-commerce.
Amazon as a pandemic stock
In the midst of all the chaos COVID-19 has unleashed on the world, there are a number of businesses thriving, represented in the new acronym ‘DAWN’ — Dominos (NYSE: DPZ), Activision (NASDAQ: ATVI), Walmart (NYSE: WMT), and Netflix (NASDAQ: NFLX).
These businesses represent the industries they dominate, but there is one glaring omission — Amazon (NASDAQ: AMZN). Amazon is the king of e-commerce, and has its Bezos-shaped fingers in almost every other pie imaginable, ranging from cloud computing to grocery shopping.
The company is the latest addition to the trillion-dollar club, and in Q1 2020, it reported that North American sales were up 29% to $46.1 billion, while international sales grew 18% to $19.1 billion. Even after Amazon Web Service Vice President Tim Bray quit the company on May 1 due to its treatment of workers, which he publicly criticized, investors took little notice. Why?
Well, e-commerce of course.
The importance of e-commerce in a pandemic
It seems quite obvious as to why e-commerce is important right now. The majority of brick-and-mortar stores have been shut down due to restrictions, and even if they aren’t, fewer people are making trips into public spaces.
Hence the need for online shopping and deliveries. Since the market hit pandemic-driven lows in mid-March, e-commerce stocks have dominated on Wall Street. Etsy (NASDAQ: ETSY) and Shopify (NYSE: SHOP) have both risen more than 100% since March 19, while the ‘Amazon of Latin America’ — MercadoLibre (NASDAQ: MELI) — has climbed nearly 40%. Even Alibaba (NYSE: BABA) is up nearly 10%, despite China’s extreme restrictions enforced since January.
This is not exactly a change of pace for them.
- Amazon stock has risen nearly 500% in five years.
- Shopify is up 2,300% in the same time.
- Etsy is up 177%.
- MercadoLibre is up 293%.
Whether the market is a bull or a bear, e-commerce just seems to be the rising trend.
What about e-commerce in a recession?
It is a far stretch to declare any business as ‘recession-proof’, but e-commerce certainly gives one food for thought. You could argue that e-commerce is thriving now because people have no other choice, but with 30% of all shopping estimated to be done online this year, there’s no hiding from the trend.
E-commerce, and Amazon in particular, tends to focus more on relationship building activities and customer loyalty than brick-and-mortar retailers. As well as this, it has far more data at its disposal than businesses with no online operations. This means better offers, unique content, and more valuable advertising.
As companies like J-Crew file for bankruptcy, Macy’s (NYSE: M), JCPenney (NYSE: JCP), and others traditional brick-and-mortars try desperately to raise capital in order to stay afloat. One of the best examples of a brick-and-mortar business pivoting into e-commerce is Nike (NYSE: NKE). The world’s leading sportswear manufacturer went with the flow and heavily invested in online retail at a time when in-store sales were plateauing. This has allowed it to maintain profits and has seen its stock grow more than 70% in the last five years.
Of course, many of these stores do already offer online options, but it may be time to think about copying out-and-out e-commerce models. This will prevent further losses in the event of another pandemic-like event, and help to keep businesses floating with the ever-flowing tide of retail.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in stocks mentioned above. Read our full disclosure policy here.