Everybody knows Amazon (NASDAQ:AMZN) dominates internet retail. The company has a $1.5 trillion market cap, and made nearly $350 billion in revenue over the last year. The stock is up 67% for the year.
|Internet Retailer||52-Week Revenues||Quarterly Revenue Growth (y-o-y)||2019 Stock Performance|
|Amazon||$348 billion||37%||up 67%|
|Sea||$3.6 billion||99%||up 349%|
|Farfetch||$1.5 billion||71%||up 374%|
Why did the stocks of these smaller internet retailers outperform the king of e-commerce? Let's explore what is happening, and whether this outperformance will continue.
Investors are shopping for the next Amazon.
Sea and Farfetch are large caps, but compared to Amazon, both are tiny. Sea started off 2020 with a market cap of $18 billion; Farfetch had a market cap of $3.5 billion back in January. So both companies started off the year with a lot of room to grow.
Demand for internet retail zoomed higher in 2020 because of our worldwide lockdown economy. All three of these companies, being digitally native, benefited from this shift. While Sea and Farfetch have minuscule revenues right now (compared to Amazon), their rate of growth is faster. Here's how trailing-twelve-month revenue grew for each company over the last three years.
The market likes that fast growth, and that growth seems to indicate that Sea and Farfetch are seizing available market opportunity and winning mindshare in their respective markets.
What we see over and over again is that the small companies that go on to become mega-caps have two major characteristics. One, they are chasing huge market opportunities. And two, these companies usually have very rapid revenue growth.
Sea and Farfetch are rising stars on the path to greatness in their respective sectors. Both companies are moving from an unknown status to more of a sure thing. Sea and Farfetch are being rewarded as the "next Amazon".
Why is Sea becoming so large, and how high can it go?
Sea's market cap is getting really big. It's now an $88 billion company. It's already passed the $65 billion market cap of MercadoLibre, the Amazon of South America. And what's exciting about this is that there is still a huge runway for growth. (Amazon's $1.5 trillion market cap shows us how vast the market opportunity in internet retail is).
Optimistic investors believe Sea can pull off an Amazon-like dominance in southeast Asia. Sea provides internet gaming, internet retail, and internet payments to seven emerging markets in the far east: Singapore, Taiwan, Malaysia, Vietnam, Indonesia, Thailand, and the Philippines.
While these seven countries might seem like small markets, in population size it's roughly equivalent to North America. Locals refer to south-east Asia as s.e.a. While Sea's name might remind Americans of Amazon, named for the mighty river, to people in the region, Sea's name reminds them of home.
In the U.S., Amazon started with internet commerce, and in 2014 acquired Twitch, the video streaming platform. Sea flipped this script -- the company started with its video gaming division Garena ("game arena"). CEO Forrest Li (named for Forrest Gump!) loves to play video games. And so Li started his journey by providing a video game platform to millions of people in the region. In the second quarter, his company announced an astounding 100 million people play Sea's battle royale game Free Fire every day.
This huge internet audience gives Sea a lot of optionality. Can the company monetize all those eyeballs? Yes it can. When Sea started its e-commerce website, Shopee, it had a built-in audience ready to go. At the time, starting up this unprofitable business seemed like a risky move as it caused the company to start bleeding cash. But it's paid off: Shopee is now the largest e-tailer in the region.
If that's not enough excitement, Li has taken this opportunity to introduce yet another business under Sea's roof: internet payments. The company has also applied to be one of Singapore's two virtual banks.
Sea forecasts that its video gaming division will make $3.1 billion in 2020 (75% growth), and e-commerce will bring in $2.3 billion (144% growth). Meanwhile, the nascent SeaMoney division saw over $2.1 billion in payments made in the third quarter. While these numbers are tiny vis-a-vis Amazon, Sea is dominating its region as Amazon dominates ours. As s.e.a. grows, Sea grows.
Why did Farfetch's stock quadruple in 2020?
Compared to Sea, Farfetch is a little niche retailer whose market opportunity is only $100 billion or so. The company, based in London, dominates the online fashion industry; these are high-end, very expensive clothes. Farfetch is a retailer that sells high fashion on its website. But more importantly, Farfetch is the founder of the "e-concessions" business model.
This model involves helping numerous high-fashion houses move their business online. And it's not at all surprising that high fashion would gravitate to the internet. That's because the customer base is very exclusive (we might use the word "rich") and spread out around the world.
Farfetch is helping its designers find these customers, while it simultaneously helps international customers find all these upscale clothes. It is very much a networking stock. That's why Amazon's announcement that it was entering the high-fashion business was a nonstarter.
Back in January, the stock market was worried about this new competitive threat, and trashed Farfetch's stock. But that simply made it a buying opportunity for Foolish investors who understand this business: It's so hard to compete against the network effect. It gives Farfetch a virtual fortress, making it next to impossible for the company to be upset by late entrants. Farfetch grew its revenue by 71% in its most recent quarter.
In November, Alibaba and Richemont invested $1.1 billion in Farfetch China, as the company moves to expand its high-fashion network into the most populous nation on earth. That big news sent the stock on a rampage last week. And yet, like Sea, we're still in the early innings with Farfetch.
Farfetch and Sea have two dominant platforms that make it hard for anybody to compete (including Amazon). And the market opportunity ahead remains huge. While there might be severe pullbacks on the way (as we saw with Amazon's stock over the years), shareholders should profit mightily over the next decade.