Chronicle Journal: Finance

2 E-Commerce Stocks to Buy in January, 2 to Avoid

The e-commerce industry is currently riding the high of renewed COVID-19 lockdown measures in many countries that are sure to extend existing remote-working patterns. This, along with Chewy (CHWY) and Carvana’s (CVNA) unique business models, should bolster their growth rates over the coming months and even post pandemic. However, Chinese e-commerce stocks Baozun (BZUN) and Alibaba Holdings Group (BABA) are currently declining due to government scrutiny, which is expected to grow more intense in the coming months. Hence, these two companies we think are best avoided for now.

2020 has been a tumultuous year for the e-commerce industry. From record market highs to dizzying selloffs, most e-commerce company stocks have experienced rollercoaster performance.

The news of successful coronavirus vaccine deployment, on one hand, has shaken investor confidence in this industry. Their fear being that once economies re-open the demand for e-commerce services will flag. However, a second strain of COVID-19 that has necessitated new lockdowns across Europe and renewed travel bans throughout the world has rekindled investors’ confidence in e-commerce stocks.

The e-commerce industry has become a vital part of many peoples’ daily lifestyle owing to the convenience it delivers. It was well established even before the pandemic and is expected to remain relevant in the years to come. Stocks such as Chewy, Inc. (CHWY) and Carvana Co. (CVNA) are well positioned to grow in the upcoming months, as demand for remote shopping continues to increase.

E-commerce companies in China, in contrast, are currently being reviewed by regulators to curb their growth and moderate their monopolistic behavior. Triggered by Alibaba Holdings Group Ltd.’s (BABA) subsidiary Ant Financial Services’ IPO, antitrust regulation related disruptions have trickled down to relatively smaller players in the country, such as Baozun Inc. (BZUN). This, combined with a recent law passed by the U.S. government that forces foreign entities listing their shares on U.S. exchanges to comply with U.S. auditing standards, reflects cloudy growth prospects for these companies, which we believe are best avoided for now.

Stocks to buy:

Chewy, Inc. (CHWY)

CHWY sells pet grooming and food supplies through its website and mobile platform. As a subsidiary of PetSmart, Inc., CHWY has partnered with more than 2000 brands to provide a wide range of pet supplies across the country. The company has an ISS Governance Quality Score of 2, indicating healthy management and corporate governance.

CHWY’s CEO Sumit Singh was named in the 2020 ‘Bloomberg 50’ group, which comprises the most influential and innovative entrepreneurs this year. The company has delivered impressive results over the past quarters under Singh’s leadership.

Earlier in November, CHWY listed Dogness International’s products on its website, effectively diversifying its product pipeline during the holiday season. The company also launched its pet telehealth service ‘Connect with a Vet’ and expanded its Pharmacy business RX this month, making it a leading supplier of a wide range of pet services in the country.

On September 21, CHWY raised $281.78 million through a public offering of 5.10 million shares. The transaction will finance the company's expansion plans, eliminating the need to take on debt. CHWY’s net sales have increased 45% year-over-year to $1.78 billion in the fiscal third quarter ended November 1, 2020. Adjusted EBITDA has risen 118% from the year-ago value to $5.50 million, while gross margin improved 180 basis points to 25.5%.

Analysts expect CHWY’s EPS to rise 33.3% in the current quarter ending January 31, 2021. The company has an impressive earnings surprise history; it beat the Street EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $1.96 billion for the ongoing quarter indicates a 44.4% rise from the same period last year.

CHWY has gained more than 430% to hit its 52-week high of $109.73 in December since hitting its 52-week low of $20.62 in March.

How does CHWY stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

B for Industry Rank

A for Overall POWR Rating.

It is currently ranked #3 of 37 stocks in the Consumer Goods industry.

Carvana Co. (CVNA)

CVNA is an e-commerce platform facilitating the purchase and sale of second-hand cars in the United States. Its proprietary 360-degree vehicle inspection technology allows users to thoroughly examine the condition of a used vehicles. The company also provides financing and warranty coverage, as well as doorstep delivery and pick-up services.

As the coronavirus pandemic has disincentivized people from using public transport and the demand for second-hand vehicles has increased significantly across the country. CVNA’s unique business model that streamlines the second-hand vehicle sale process has made it one of the most popular platforms in the used-vehicles market.

CVNA expanded its services across the country by launching its platform in Arkansas and Hot Springs in December. Earlier in November, the company launched a flagship car vending machine in Atlanta, allowing customers to buy and sell cars within five minutes. It also has a seven-day return policy, along with home delivery and ‘as soon as next day’ pick up.

CVNA sold 64,414 retail units in the third quarter ended September 30, up 39% year-over-year. Its revenue has increased 41% from the year-ago value to $1.54 billion, while gross profit has risen 90% from the prior- year quarter to $261.30 million.

CVNA has gained more than 1,135% since hitting its 52-week low of $22.16 in March. The stock hit its 52-week high of $292.76 on December 23.

It is no surprise that CVNA is rated “Strong Buy” in our proprietary POWR Ratings system, with an “A” for Trade Grade, Buy & Hold Grade, Peer Grade and Industry Rank. It is currently ranked #5 of 61 stocks in the Internet industry.

Stocks to avoid:

Baozun Inc. (BZUN)

BZUN provides e-commerce solutions covering all aspects of the value chain to brand partners based in China. Its integrated end-to-end e-commerce services facilitate IT solutions, warehouse and fulfilment requirements, online store operations and customer services.

BZUN is currently being investigated by Labaton Sucharow because it allegedly failed to report the higher add-on fees paid by Huawei Technologies for its services. Also, the company allegedly reported outsized revenues in the first half of 2019.

On October 29, Scott+Scott Attorneys at law launched an investigation into BZUN for allegedly violating federal securities laws during its American depository receipts public offering in April last year.

BZUN generated RMB16.50 billion in revenues in the 11.11 festival from November 1 to November 11. While the company witnessed a record surge in its sales, the Chinese regulators imposed antitrust regulations following this period to curb the company’s perceived monopolistic behavior.

BZUN’s revenues have increased 21.7% year-over-year to $269.40 million in the third quarter ended September 30, 2020. Non-GAAP income from operations rose 47.1% from the year-ago value to $16.40 million, while EPS nearly doubled to $0.22.

Despite delivering impressive financial results over the past quarter, analysts have a bleak outlook regarding the company’s prospects, as most of China’s biggest e-commerce players are under government scrutiny. BZUN’s EPS is expected to rise at a rate of just 4.8% per annum over the next five years. The consensus revenue estimate of $532.48 million for the current quarter ending December 31, 2020 represents a 33.8% rise year-over-year.

BZUN has declined 19.7% over the past six months. The stock has declined 32.4% since hitting its 52-week high of $47.51 in July.

BZUN is rated “Sell” in our POWR Ratings system, with an “F” for Trade Grade, a “D” for Peer Grade and Industry Rank, and a “C” for Buy & Hold Grade. It is currently ranked #47 of 115 stocks in the China group.

Alibaba Holdings Group Ltd. (BABA)

As the largest e-commerce company in China, and second largest in the world, BABA is most affected by the Chinese antitrust regulations. In fact, the company came onto the government’s radar following its record sales during the 11.11 festival, in which it generated $74.10 billion in revenue within weeks.

BABA has a 33% equity stake in Ant Financial Services, which was expected to be the biggest IPO of all time earlier this year, valued at $35 billion. However, the IPO was halted by the company five days before its listing citing regulatory and disclosure requirements. Ant group was ordered to revamp its business model today, leading to a sharp decline in BABA’s shares. In fact, BABA has declined more than 14% over the past five days, amid heightened government pressure and losses from the halted IPO.

The Chinese government has ordered Ant to focus on its original business model, foregoing its subsidiary business in insurance and money management. This could ramp-up the losses for parent company BABA, which has a substantial stake in the company.

Under China’s recently passed antitrust law, Chinese regulators could impose up to a 10% fine on revenues on BABA, which could amount to a staggering $7.80 billion. Moreover, the company dealt with on-site investigation by officials last week, the news of which caused BABA’s shares to fall steeply across the Shanghai, Hong Kong, and U.S. stock exchanges.

BABA’s revenues have increased 30% year-over-year to $22.84 billion in the third quarter ended September 30, 2020, before the antitrust allegations. Mobile monthly active users (MAUs) in China increased slightly from the prior quarter to 881 million.

The consensus EPS estimate of $3.31 for the current quarter ending December 31, 2020 indicates an 81.8% decline year-over-year.

BABA has declined 1.9% over the past six months, and 20.7% over the past month.

BABA is rated “Neutral” in our proprietary POWR Ratings system, with a “D” for Trade Grade and Industry Rank, and “C” for Buy & Hold Grade and Peer Grade. In the 115-stock China group, BABA is rated #22.

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CHWY shares fell $0.13 (-0.14%) in after-hours trading Monday. Year-to-date, CHWY has gained 219.34%, versus a 17.79% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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