Every investor knows by now that e-commerce companies have been among the big winners during the coronavirus pandemic.
Stocks like Etsy, Shopify, and Wayfair have soared as online sales have skyrocketed with Americans reluctant to venture to stores and spending more time at home than usual.
However, one of the best-performing e-commerce stocks during the crisis has been mostly ignored by the market. Shares of CarParts.com (PRTS -5.68%), the leading online seller of auto parts, are up nearly 400% year to date, and at one point were up close to 600%. Still, the stock hasn't gotten nearly the level of attention that some of the more popular e-commerce plays have.
Like its online retail peers, the company has delivered exceptional growth this year, riding a boom both in e-commerce and in auto parts. Demand for used cars has spiked during the pandemic as Americans look to avoid public transportation and those who have moved out of cities need a set of wheels.
In its third quarter, CarParts.com revenue jumped 69% year over year to $117.4 million, easily beating estimates at $91.8 million as gross margin expanded from 30.5% to 36.7% and adjusted EBITDA improved from $1.3 million to $5.1 million. That growth rate even accelerated from the second quarter, when the company saw year-over-year revenue growth jump 61%.
It might be easy to look at CarParts.com as a simple pandemic breakout story, but there's more to it than that.
A little background
CarParts.com is actually about as old as the World Wide Web. Founded in 1995, the company was long known as U.S. Auto Parts before changing its name to CarParts.com in July of this year. For years, the company was little more than a sleepy player in the $500 billion global auto parts industry, but that began to change when Lev Peker took over as CEO at the beginning of 2019. Since then, the stock is up nearly 1,000% and that performance isn't only due to the coronavirus pandemic. In fact, from the beginning of 2019 to Feb. 19, 2020, when the S&P 500 peaked before the pandemic hit, the stock had nearly tripled, surging after nearly every earnings report.
Peker, along with COO/CFO David Meniane who joined the company shortly after, brought in a new management team and overhauled the company, investing in technology and marketing, adding two new distribution centers with a goal of achieving one-day delivery to 90% of the U.S., and focusing on the CarParts.com brand, which is responsible for a majority of sales.
It didn't take long for those efforts to show results. Though revenue declined slightly last year as the company pulled out of unprofitable businesses and focused more on higher-margin private label products, gross margin -- perhaps the best measurement of the company's operating efficiency -- rose 280 basis points in 2019 to 30% with improvements accelerating over the course of the year, paving the way for continued improvements.
Where CarParts.com stands today
When the pandemic hit, business surged at CarParts.com as it has for other auto parts retailers and e-commerce companies, and that lifted the stock up as much as 600% year to date.
However, Peker and Meniane don't see the current surge as merely a pandemic-fueled boom. They note that the auto parts industry is ripe for disruption as it has one of the lowest e-commerce penetration rates of any retail sector, in only the low single digits before the pandemic. However, the industry is also well-suited to e-commerce disruption as online suppliers like CarParts.com can carry more stock-keeping units (SKUs) than a typical auto parts store, and in an industry with millions of SKUs, that's a clear advantage.
Additionally, by sourcing private-label products from mostly Taiwan and China and eliminating middlemen, management says it's able to beat the competition on price, and with one-day delivery to about 60% of the country today, and headed for 90%, the company offers a level of convenience that brick-and-mortar retailers don't.
On a valuation basis, the stock trades at a price-to-sales ratio of less than 2, making it cheaper than almost any other e-commerce stock on the market. Like other online retailers, the company faces considerable uncertainty as the end of the pandemic will likely bring about a shift away from the online channel, though it's unclear how much.
Still, auto parts retailers have traditionally performed well in recessionary environments as consumers avoid purchasing new vehicles and instead repair the ones they currently drive or look to used cars instead. That seems to be what's happening now, as Peker explained that the company's customer base is spending money because they need to, not because they want to.
The stock sold off following its third-quarter report as Pfizer reported on the same day that its coronavirus candidate was effective in more than 90% of Phase 3 trial participants. That may be a sign that investors are concerned about growth slowing when the pandemic ends, though COO/CFO Meniane noted, "The whole e-commerce space took a hit this week, but we've been clear from the beginning that COVID-19 accelerated trends and changes in consumer behavior, not our business."
However, management has proven its ability to drive profitability in the business, and the industry should gradually shift toward the online channel, as so many other retail sectors have, especially as CarParts.com expands the availability of one-day delivery.
Even after the blowout performance over the last two years, the stock still looks like a good value considering its growth potential, and the company is only valued at around $500 million. If management executes on its plan, this stock could easily be a multi-bagger from here over the coming years.