After an epic run in e-commerce stocks last year -- some of which advanced by triple-digit percentages in 2020 -- don't expect a repeat performance anytime soon. E-commerce is a long-term secular trend, so a purchase should be made with the intent of holding for a long time (think years, a decade, or more if possible).
1. Chewy: Technology services for your four-legged family members
After a more than 30% plunge from all-time highs, fast-growing online pet supply company Chewy looks like a great buy once again. Chewy has been picking up lots of pet and "pet parent" fans the last few years, but the pandemic supercharged its efforts.
Chewy added a net 5.7 million new customers in 2020 and finished out the year with 19.2 million total. Total revenue jumped 47% to $7.15 billion. As Chewy automates the shipping of basics like food to households with pets, these customers are very sticky and are likely to stay with this retailer even as the effects of COVID-19 start to ease. Management is forecasting at least another 25% increase in sales in 2021 as it prioritizes adding new customers.
But this is more than a store for your four-legged friend's most essential needs. Taking a cue from the likes of Amazon, Chewy is experimenting with other tech-enhanced services to expand its ecosystem. Its new Connect With a Vet telehealth offering is a good example. Pet owners can schedule a visit with a veterinarian over phone or video conference, a service that has been in high demand for humans as of late. Now the same experience can be had for animals too -- for free for customers who have signed up for Chewy's auto-ship feature.
Chewy may be a niche play on e-commerce, but the pet industry is worth $100 billion a year in the U.S. alone (Chewy has yet to start expanding beyond the States), and the market is expected to expand to $120 billion a year by 2024. There's plenty of long-term potential here. And at less than four times expected 2021 sales and 50 times adjusted EBITDA, now looks like an opportune time to treat yourself and your animal loved ones to some Chewy stock.
2. Etsy: Craft goods have gone mainstream
Speaking of beaten-down e-commerce stocks, Etsy's stock price is down some 25% from its all-time highs. Revenue was up a whopping 111% last year to $1.73 billion, driven by a doubling in merchandise sold on its platform in 2020 to $10.3 billion for the year. Etsy is a highly profitable firm too. Adjusted EBITDA was up nearly 200% to $549 million last year. Even after the recent pullback, Etsy share prices are up nearly 350% since the start of 2020, so it's no surprise the stock is now taking a bit of a breather.
But exacerbating the recent bout of volatility here is excessive worry Etsy will suffer as effects of the pandemic ease. Often overlooked, though, is that Etsy was a high-growth business before COVID-19 emerged, and it will remain so afterward as well. The numbers looked big last year, but this online marketplace is still a tiny fraction of the hundreds of billions spent online in the U.S. -- let alone the rest of the globe. And according to the U.S. Census Bureau, less than 20% of U.S. consumer spending goes to online-only stores. Etsy has lots of room to pick up more share of shoppers' wallets.
Central to this growth strategy is the fact that Etsy helps connect consumers with people who make products by hand. From apparel and accessories to household furniture and decor to customized gifts, Etsy is increasingly becoming a top-of-mind destination for goods with a story.
CEO Josh Silverman has stated that nearly everything that can be found on Amazon is also available on Etsy, but buyers can connect directly with the people who crafted the item and support small businesses and entrepreneurs along the way. In a post-pandemic world where e-commerce technology is increasing the ease of people starting their own business, this is a powerful position for Etsy to be in.
At 14 times trailing 12-month sales and over 45 times adjusted EBITDA, this is a premium-priced e-commerce stock. Nevertheless, the potential is there for Etsy to continue its run higher in the years ahead as it helps craftspeople take back a share of the massive retail industry. I remain a buyer after the drop in share price last month.
3. Baozun: A top partner for selling in China
As an e-commerce business operating in China, Baozun's fortunes are closely tied to China's largest online marketplace and tech titan Alibaba, which has fallen under intense regulatory scrutiny as of late. But this company is far from totally reliant on Alibaba.
Its function is to act as a logistics partner for brands that want to sell in the Middle Kingdom without needing to set up their own branch offices in the country. It has some sizable customers, including Nike, Starbucks, and Nintendo to name just a few, and integrates with other Chinese e-commerce platforms besides Alibaba, like JD.com and Tencent.
In spite of the ongoing U.S.-China trade war, the pandemic, and regulatory concerns for China's biggest tech firms, Baozun is doing just fine. It ended 2020 with 258 brand partners, up from 222 at the end of 2019. Total revenue on the year increased 22% to 8.85 billion Chinese renminbi ($1.36 billion), and adjusted net income increased 50% to 535 million renminbi ($82.0 million).
The company also ended the year with $771 million in cash and equivalents and $270 million in debt on the books. Still in growth mode, Baozun is quickly reaching a more profitable scale as it expands its customer base and shipping and logistics operations across the Pacific.
In spite of the solid end to a challenging year, Baozun stock pulled back once more during the month of March -- caught up in the high-flying tech stock sell-off. Share prices are down 35% from their most recent highs. But this is no overpriced tech or digital commerce outfit. After the latest drop, the stock trades for just 1.8 times 2020 sales and 35 times adjusted income.
With China's middle class still developing (and constantly demanding more higher-quality goods and services) and international brands looking for a foot in the door, Baozun's growth prospects remain rosy. This will be a highly volatile stock, though. Baozun is a tiny company, and regulatory concerns are always present when investing in a Chinese company. But after the recent sell-off, Baozun looks too cheap to ignore.