What’s the Deal With Zulily?

Throughout most of 2014, Zulily  (NASDAQ: ZU  ) has been the black sheep of e-commerce, falling from a high of over $70 to as low as $30. However, over a two-day period the shares have soared over 15% on the back of two upgrades. With Zulily still far off of its 52-week highs, does the stock present more upside than peer Overstock.com (NASDAQ: OSTK  ) and juggernaut Amazon (NASDAQ: AMZN  ) ?

What are the analysts saying?
Zulily is an e-commerce flash-selling company that buys products in bulk and then sells them to its customers at specific times at low prices, also in bulk. The company specializes in women's and children's products.

At the end of the first quarter Zulily had 3.7 million active customers, which represented a rise of 1.8 million over the prior-year figure.    Goldman Sachs believes the company can sustain this impressive rate of customer growth. In fact, Goldman's expectations for stronger-than-expected customer growth led to a Buy rating and a $50 price target.

Also, RBC is bullish  on Zulily with a Buy rating, and likes the company's opportunity to expand beyond children's and infant clothing. If so, Zulily would clearly become more appealing to a broad number of consumers, which would thus spark revenue and customer growth. Notably, Zulily's revenue grew 87% year-over-year to $237.9 million in its last quarter. 

A strategic buy, sell, and ship model
Essentially, Zulily is about the same size as Overstock.com; analysts expect that Zulily and Overstock.com will finish 2014 with revenue of $1.2 billion  and $1.4  billion, respectively. The difference is that Zulily will grow revenue nearly 75% while Overstock.com's revenue growth will be much slower at 8%.

The growth disconnection brings up a good point in favor of Zulily and that's the lack of direct competition against the likes of Amazon.com. Specifically, Zulily has a niche market in the children and women's category, while companies like Overstock.com and Amazon.com cater to all categories within e-commerce. This puts Overstock.com at a real disadvantage in trying to match Amazon's aggressive pricing while keeping inventory at competitive levels even though it is a fraction of Amazon's size.

Zulily's buy, sell, and ship in bulk model gives it pricing power and cost synergies. As a result of this Zulily forecasts a profit margin of over 1.5%  for the full year despite heavy spending on infrastructure, fulfillment centers, and marketing.

Meanwhile, Overstock.com must be thriftier because of its large inventories. Its stock price is down almost 60% from last year's high partially because it has increased its spending and fulfillment expense has grown as a percentage of total revenue to nearly 89%, which creates the need for further investments.

Zulily has a business model that creates strong pricing leverage and gives the company maximum operating efficiency. E-commerce is an industry that's not built to create high margins, as even Amazon.com with revenue of nearly $80 billion still has an operating margin below 1%. Investors must like Zulily's opportunity to not only grow rapidly in the years ahead, but also to create rare profits in this space.

Foolish thoughts
While Zulily's not cheap at 6 times sales, and it likely won't become the next Amazon.com, this is a company that could still grow significantly larger with higher margins over a period of several years. In other words, it seems to have many years of growth ahead, unlike Overstock.com, and likely has far more investment value than a $150 billion Amazon.com, a company that faces increased e-commerce competition as the U.S. leader in this space.

With all things considered, RBC and Goldman make good points. If Zulily expands both horizontally and vertically while growing customers and new product segments, respectively, then investors should like the stock's opportunity to trade significantly higher in the long term.

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