In 2020, we leaned more heavily on e-commerce for continuing our way of life. While moving on from COVID-19 could challenge this continued momentum, all signs are pointing to the industry enjoying a sustainable growth runway over the long term.
According to Grand View research, global e-commerce is poised for a compound annual growth rate (CAGR) of 14.7% through 2027. Ozon Holdings (OZON), an e-commerce player located in Russia, is my favorite way to invest in this compelling trend. Here's why.
Russian e-commerce is ripe for the picking
Russia's economy is ideal for e-commerce growth. Eighty-three percent of the nation's population access the internet, which compares favorably to the 59.5% usage rate realized across the globe as a whole. What this means is Russians are relatively more comfortable using the internet and the infrastructure is already in place to support that usage. Perhaps even more encouraging is that the Russian e-commerce usage rate sits at an extremely modest 9%. To compare, developed economies like China and the U.K. boast e-commerce usage rates of 27.1% and 18.3%, respectively.
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The combination of an internet-savvy population and little e-commerce saturation provides an opportunity for Russian e-commerce. Possibly as a result, the sector is estimated to post a 17% CAGR through 2025.
For Ozon specifically, things are looking just as rosy. Through the heat of the pandemic, Ozon managed to more than triple its Russian e-commerce gross merchandise value (GMV) growth of 41% to 144%. Not only is its GMV rapidly expanding, but the growth rate is also rising, which hints at this trend being durable.
What's even more impressive about this progress is that it coincided with Ozon's net promotor score (NPS) spiking from an already solid 67 to a stellar 79. Ozon also maintained its 95% on-time delivery rate while this was occurring. When a company can improve customer service while demand is exploding, that is a strong sign of talented leadership.
While Russia is ripe for e-commerce growth, the sheer size of the country makes logistics quite challenging. Because of this, Ozon is investing heavily in its fulfillment and courier networks. Last year, the company eclipsed its largest competitor, Wildberries, to claim the largest pickup footprint in Russia and Ozon has more than quadrupled its fulfillment footprint since 2017 with no signs of investment in that area slowing down. As of September 2020, Ozon was able to execute next-day delivery for 40% of Russia, and that number should continue to rise over time.
Ozon is thriving financially
To complement the exciting opportunity, Ozon is already showcasing strong financial results. In its first public quarter, Ozon delivered 80% revenue growth to reach 37.7 billion rubles (roughly $504 million) in sales. Furthermore, its gross profit margin expanded from 18.6% to 30.7% and it even posted a 20.4% free cash flow margin -- not something we often associate with rapid top-line growth in 2021.
Despite the outsized growth and improving profitability, Ozon trades for just 8 times its enterprise value to 2020 sales.
Beyond the core business excelling, Ozon's new projects are also showing encouraging signs of success. Its debit card now has 450,000 sign-ups representing a 690% increase year over year. These holders also order with Ozon 60% more frequently than non-holders, pointing to the benefit of cross-selling for this company. Ozon recently purchased Oney Bank, a boutique Russian bank to further expand into the financial technology space, and so far it has been successful.
While all evidence points to a solid growth -- especially from a business perspective -- its important to consider the geopolitical risk associated with owning a Russian enterprise. Sanctions and conflict are always a heightened possibility, but I'm personally willing to stomach that risk for access to all of the company's potential upside. It also helps that Ozon is focused solely on selling in Russia rather than to North America or Western Europe, but still each investor must individually decide how they feel about this unique risk.
Ozon is a strong buy
Ozon offers investors the rare combination of an untapped operating environment, rapid demand growth, and profitability. The company is firing on all cylinders and looks primed for greater dominance going forward. I own Ozon for the long term and think anyone with a tolerance for geopolitical risks should consider it as well.
