The American and global economies are getting back on their feet in 2023. Inflation has slowed down. Regulators and lawmakers everywhere are returning to looser price-control policies. Is the e-commerce industry looking at the start of a fresh bull market?
Some signs point to a clean bill of health, but others suggest that online shopping still sits in a market trough. Let's have a look at the green and red flags investors should consider before buying shares of e-commerce giants Amazon (AMZN 3.43%), Etsy (ETSY 0.34%), and Shopify (SHOP 1.11%).
Green flag: Supply chains are back to full health
Supply chains of every stripe were brought to their knees by the pandemic in 2020. Several waves of fallout from the health crisis followed and were combined with geopolitical issues around Russia's invasion of Ukraine and China playing economic hardball with Western countries. Soaring fuel prices added to the supply chain pressure.
As a result, manufacturers couldn't get their hands on the components needed to build new cars, smartphones, and other consumer goods. The small volumes of finished goods also had to make their way from factory to store shelves (figuratively speaking), and that was another difficult and costly process.
The causes of the supply chain stress are not completely gone, but improvements and workarounds have made a big difference. The global supply-chain pressure index, which builds a stress value out of 27 metrics across the air freight and maritime shipping sectors, is supposed to sit just below zero in a completely healthy shipping environment. The stress level rose as high as 4 when the inflation crisis kicked off and has now dipped all the way down to minus 1.2. Remember: A normal market should see roughly zero supply chain stress:
Global supply chain pressure index data by YCharts.
Despite elevated fuel prices and geopolitical tension, the supply chain pressure might be too low for comfort. A profoundly negative value, like the current reading, suggests that shipping systems are ready to handle a much heavier load than they are actually asked to manage. So the supply-side issues are going away, giving e-commerce businesses easy access to effective shipping services (albeit pricey services due to the high fuel costs).
Red flag: Shopping sprees are still rare
The downside to the low pressure index is that market demand looks weak. You can make and ship as many gadgets and trinkets as you like, but what's the use if people aren't ready to buy them?
The average consumers are not yet ready to loosen their tight grip on their budget purse strings. Consumer confidence indicators are coming back from the historic lows of 2022, but it's a long way back, and the recent brush with sky-high inflation made people less interested in taking financial risks. So the supply chain is ready to go, but consumers are not ready for cathartic shopping sprees.
That being said, e-commerce retailers are still stealing market share from traditional brick-and-mortar stores. U.S. retail revenue has flattened out since the spring of 2022, but online sales didn't follow suit:
U.S. retail sales data by YCharts.
And the true leaders in the e-commerce space continue to set the pace. Amazon's top-line sales rose by 18% in the last two years. Etsy's custom and handmade goods saw a 22% revenue gain over the same period. Shopify led the pack with a soaring 53% revenue gain as small and medium-size businesses embraced the company's digital storefront and payment solutions.
I'm not trying to dye this red flag green. Retail specialists on both sides of the digital/physical divide are still struggling to inspire healthy sales growth. Even Shopify's impressive chart represents a modest long-term slowdown.
So it's not shocking to see Etsy's, Amazon's, and even Shopify's shares trading more than 30% below their all-time highs in the summer of 2023. The e-commerce industry is looking at a return to full health, but that bounce needs support from a robust economy with stable pricing trends and solid financing options.
If you expect to see the world economy's white knights riding to the rescue in the fall, you may want to grab some top-quality e-commerce stocks while they're cheap. Etsy, Amazon, and Shopify are good places to start your search for a low-priced play on the online retail recovery.
