MoffettNathanson told clients that winners and losers in e-commerce are likely to grow only more bifurcated post-pandemic in an initiation note on a host of e-commerce stocks.
The analysis voiced confidence in continued e-commerce growth overall, eschewing the “bear case of peak e-commerce penetration.” However, the sector is no longer growing at the pace whereby there can be winners all around. Instead, leaders in convenience and price like Amazon (NASDAQ:AMZN) are expected to continue to take market share while the valuation of more challenged names like Wayfair (NYSE:W) will likely continue to fall, in the firm’s view.
“Our investment framework prefers market share gainers (AMZN), Etsy (NASDAQ:ETSY) as the algorithm of the internet creates a self-fulfilling prophecy for continued share loss once it starts,” the note read. “As a result, it’s challenging for us to have an appetite for market share losers, at almost any valuation level. We consider these businesses “cheap for a reason” eBay (EBAY), Chewy (CHWY), Wayfair (W) and unlikely to experience sustained multiple expansion as concerns of obsolescence hang over them.”
The analysis offered by analyst Michael Morton added that both Wayfair and Chewy “are coming out of the pandemic competitively worse than they entered” with brick and mortar competitors building out their own e-commerce efforts and taking share. While Etsy (ETSY), eBay (EBAY), and Chewy (CHWY) were each started at Hold-equivalents, Wayfair was initiated at a Sell-equivalent due to concerns over its cash-burning habits.
Additionally, Shopify (SHOP) was initiated at a Hold-equivalent and assigned a $30 price target despite the apparent attractiveness of its services and opportunity. Still, a concern on profitability and the complicated nature of its business held back the firm from rating the Canadian e-commerce player at Buy.
“We are cautious on businesses trying to do too many things at once,” Morton wrote. “A clean narrative helps drive a higher multiple, or said differently, ‘the more explaining you have to do, the lower the multiple’.”
In the end, Morton viewed the pandemic as a double-edged sword. In short, the rush to online shopping allowed the entire sector to grow rapidly at the expense of brick and mortar enterprises that were forced to close their doors. Now that this dynamic has evaporated, winners and losers are likely to become far clearer, in Morton’s view.
“Gone are the days of eating the lunch of legacy brick and mortar. Not all ecommerce platforms are created equal with a right to win, in our view,” he concluded. “To continue gaining share, a successful marketplace should aggregate a unique supply, have superior brand equity to generate traffic, and leverage global scale. Selling commodity products, without fulfillment scale in categories when speed matters, will ultimately lead to market share and margin erosion.”
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