Many investors may not perceive retailing as a growth industry. Prominent players in the industry, such as Walmart, have often logged single-digit comparable sales growth and usually sell at average earnings multiples.
However, innovations in retailing niches such as e-commerce have often spawned notable growth stocks. And amid the recent market struggles, internet and direct marketing retail stocks such as Amazon (AMZN -0.01%) and Etsy (ETSY -0.22%) present unique opportunities.
1. Amazon
Amazon's recent 20-for-1 stock split could give this struggling stock a boost. Stock splits do not change the fundamentals, but the lower price could make shares more attractive to smaller investors, a factor that might increase demand and liquidity.
Amazon stock might need this help right now. Like other retailers, it has struggled with supply-chain issues, rising labor costs, and price inflation. This showed up in Amazon's earnings report for the first quarter of 2022. Net sales came in at $116 billion for Q1, a 7% increase vs. the year-ago quarter. This is a dramatic slowdown considering the 22% rise in net sales in 2021.
Moreover, a 13% surge in operating expenses cut operating income by 59%. Add over $8 billion in losses on marketable equity securities, and Amazon lost $3.8 billion in the quarter, down from an $8.1 billion profit in the first quarter of 2021.
However, investors need to remember that Amazon is also the leading cloud infrastructure company. Grand View Research estimates a global $368.97 billion market size as of 2021, and it believes this market will grow to $1.55 trillion by 2030, reflecting a compound annual growth rate of 16%.
Its cloud division, Amazon Web Services (AWS), seems to have benefited. AWS experienced a 36% revenue surge to $18.4 billion, or around 16% of Amazon's net sales. This took its operating income 56% higher to $6.5 billion. In comparison, the North America and International segments logged a combined operating loss of over $2.8 billion, further cementing AWS's place as the profit center of the company.
Also, though Amazon stock dropped 23% over the last year, it still has risen 144% over the previous five years, well ahead of the S&P 500's 87% gain. Moreover, valuations have fallen dramatically. Its current P/E ratio of about 58 comes in well below the triple-digit earnings multiples it has experienced over the past decade, a level that could seem low again if it can turn its retail operations back to profitability.
2. Etsy
On the surface, an artisan-oriented e-commerce site such as Etsy may struggle to compete with Amazon and others. At a market cap of just $10.6 billion, it is less than 1% of Amazon's market cap of around $1.25 trillion.
However, Amazon's success has typically come from commoditized products. This leaves a niche for Etsy, which limits itself to artisans, craft suppliers, and vintage goods dealers.
Additionally, its growth story likely hinges on international expansions. Etsy has built a significant following in the U.K. and Germany and has expanded marketing into many EU countries.
Moreover, its purchase of Elo7 last year, the so-called "Etsy of Brazil," hints at its potential in the developing world. The company estimates an addressable market of $2 trillion, of which Etsy currently serves only about $12 billion, a situation that could make Etsy a top e-commerce buy right now.
Still, amid supply-chain and inflation-related challenges, growth has slowed dramatically. In the first quarter of 2022, revenue increased only 5% to $579 million increased 5% from year-ago levels. This is a dramatic slowdown considering that 2021 revenue climbed by 35% compared with 2020.
Also, during Q1, operating expenses increased 25% year over year, causing its net income to fall to $86 million, a 40% drop vs. the first quarter of 2021.
Furthermore, its pain could continue. The company forecasts between $540 million and $590 million in revenue for Q2, representing a 7% increase at the midpoint. This slowdown probably contributed to the stock's decline of over 70% from its peak in November.
However, the shares now sell for just about 28 times earnings, near a record low for Etsy. Given the company's largely untapped markets and aggressive moves outside the U.S., it will probably move past its current challenges over time.
