E-commerce stocks have been some of the worst performers over the last year. But online sales have continued to grow faster than the broader retail market, which could set up the potential for market-beating returns when online sale accelerate again.
Etsy (ETSY +5.34%) and Farfetch (FTCH +0.00%) are two leading e-commerce marketplaces that offer big upside, according to Wall Street analysts. Here's why these internet retail stocks could be substantially undervalued.
NYSE: ETSY
Key Data Points
1. Etsy
Shares of Etsy are about 65% off their all-time high and down 7% year to date. Slowing growth across the e-commerce market over the last year has weighed on Etsy's top line, but the specialty marketplace should emerge from the slowdown in a stronger position to drive growth.
Needham & Co. analyst Anna Andreeva upgraded the stock to a "buy" rating at the beginning of the year with a $160 price target. That is 44% higher than the current stock price. The analyst sees improving growth pushing the stock price higher, given Etsy is trading at a more attractive price-to-sales valuation compared to pre-pandemic levels.
Improving the browsing experience on the website is crucial for Etsy's business. Buyers typically go to Etsy to find special items you can't find anywhere else. Management spent the last few years improving search and discovery for buyers. Etsy's search engine uses deep learning to understand what a buyer means when entering for a particular term, which is improving buyer conversion.
The company is making great strides. After the improvements to the browsing experience, 90% of purchases now occur from the first page of search results. In a very competitive online market, where buyers could grow impatient if they don't find what they are looking for and easily click to a competitor's website, Etsy is making the right investments to deliver a more convenient shopping experience.
These improvements should pay off for Etsy as the company lapses the year-ago declines in sales from a weak macroeconomic environment. The company grew gross merchandise sales (GMS) by 26% in 2019, 106% in 2020, and 31% in 2021, before declining 1% in 2022.
But it's not just about buyer and seller transactions. Etsy's marketing, technology, and reach with 95 million active buyers justifies the fees it charges on each completed transaction. This has allowed the company to continue growing revenue while GMS was under pressure last year.
Data by YCharts
Keep in mind, Etsy could see further pressure in GMS growth in the near term. In the fourth-quarter earnings report, management cited volatility in sales activity at the start of the first quarter, along with credit card data suggesting that consumers are shifting more spending to everyday essentials and away from discretionary categories.
But the economy will see better days. The near-term uncertainties are why the stock is trading at its lowest price-to-sales multiple in the last five years at about 5.9. A low valuation ahead of an eventual recovery would set the stage for double-digit annualized returns over the long term, as Etsy grows into a massive e-commerce opportunity.
ETSY PS Ratio data by YCharts. PS = price-to-sales.
2. Farfetch
Farfetch is the leading global luxury goods platform, and its technological capabilities are attracting luxury brands like a magnet. The marketplace has more than 1,400 sellers, including leading department stores and top luxury brands. The company uses a smart supply chain and logistics solutions to deliver value-added services to third-parties. As more merchants join the platform, Farfetch is able to provide a wide selection of items that attracts millions of consumers.
Farfetch is building a solid competitive moat to tackle a $100 billion online luxury goods market. This explains why Morgan Stanley analyst Simeon Gutman believes Farfetch is best positioned to benefit from the coming e-commerce reacceleration. Many analysts seem to agree, as the average price target on Farfetch is over 150% higher than the current share price.
Despite global disruptions to the market last year, Farfetch grew the top line by 12% on a constant-currency basis. It's entering 2023 with a more efficient business following cost reduction efforts.
Since 2015, the company's overhead and technology expense significantly decreased relative to revenue, putting Farfetch on a path to turn a profit.
Image source: Farfetch.
It's encouraging that active customers grew 6% in the fourth quarter despite cost cutting, including closing 15 store locations across two of Farfetch's owned retail brands, Stadium Goods and Browns.
Management's guidance calls for revenue growth to improve throughout 2023. On that note, recent partnerships with leading luxury companies Richemont, Neiman Marcus, and Ferragamo show Farfetch's growing clout in the industry and why it's positioned for a bright future.
Management believes it can reach $10 billion in gross merchandise volume by 2025, compared to $4.1 billion in 2022. With adjusted operating profit also expected to reach a double-digit margin of revenue, the stock could have significant upside from these lows.
