E-commerce saw significant growth in 2020 because of global movement restrictions, as consumers were forced to reduce physical retail time. This trend continued in 2021, as people became more comfortable buying products online.
Companies took the opportunity to maintain the trend through technological improvements and increased advertisement spending through avenues such as social media. Big corporations initially benefited from this, as they already had working online platforms. Meanwhile, the small businesses that struggled during extended shutdowns discovered that e-commerce could be a lifeline.
Many e-commerce companies recorded year-on-year growth in 2021 despite the already-high growth in 2020. They expanded and diversified their revenue streams, such as the provision of priority access to purchases and priority delivery services.
The added time spent on online platforms also allowed for increased advertisement revenues as consumer spending recovered in 2021.
The projection for e-commerce in 2022
Once again, we expect e-commerce to grow in 2022. However, this is projected at a slightly slower pace than 2021. After all, we are already in our 3rd year of rapid growth. Markets are starting to look saturated from the competition.
Some challenges may turn into opportunities, such as the shipping crisis drastically jacking up transportation costs. With these concerns in mind, e-commerce companies are looking for ways to grow, improve, and outperform their competitors. Some considerations are subscription models, improved user experience, and enhanced data analysis for targeted advertisements.
In identifying potential e-commerce companies for outperformance, we look at e-commerce companies that have strong track records. They must be market leaders, great at capturing growth in emerging markets, and able to turn a profit in mature markets.
In this write-up, we will look at several different companies. Although they have various income streams, we will focus on their e-commerce segment.
1) Amazon
Amazon has been the most dominant e-commerce company globally, with a 44% increase in sales in the US for 2020 and a 10% increase in 2021. Central to consumers’ day-to-day lives, Amazon has continuously reinvested profits to improve itself for customers.
Amazon investments
i) An updated delivery system
Amazon invested aggressively to strengthen its fulfilment network so it can offer faster delivery to more customers.
Some examples include having its own aircraft fleet and a fully electric autonomous delivery system. It even expanded Same-Day services to additional US cities.
ii) New shopping experiences
Amazon brought the “Just Walk Out” technology to full-sized grocery stores, offering customers the option to skip the checkout line.
There is also the Discover Rooms platform, an immersive shopping experience. It helps customers choose from thousands of home room designs by suggesting inspiration based on visual attributes. The experience is now available in nine countries.
Valuation and projection
Amazon’s share price in 2021 was lacklustre. It currently trades at a P/S of around 3.8 times and a one-year forward P/S of less than 3.4 times. This is its lowest valuation so far, thus providing plenty of upside.
2) Mercadolibre
Mercadolibre is the largest e-commerce and payments ecosystem player in Latin America, with a presence in 18 countries. After a blockbuster year in 2020, where net revenues grew 148%, it was still able to grow 90% in 2021. This means revenue grew more than 2.5 times in 2 years.
Mercadolibre growth and initiatives
We expect growth to continue in 2022 as user numbers and purchase-value-per-customer increase. This is mainly because the Latin American market is far from saturation, providing Mercadolibre with endless growth opportunities.
i) Expanded product coverage
Mercadolibre continuously improves buyer engagement and retention through initiatives such as increased product depth and breadth. Items from major brands such as Nike, Playstation, Apple, and Samsung have been added to its platforms.
It also collaborated with a local food retailer to offer fresh food selections to customers.
ii) Increase in subscriptions
With these premium offerings, Mercadolibre has seen an increased take-up rate. With the improvements strengthening its subscription model, we expect subscriptions to further increase.
iii) Acquisition of Kangu
In 2021, Mercadolibre strengthened its fulfilment network by acquiring Kangu, a vertically integrated logistics operator and an existing strategic partner. Kangu provides collection, delivery, and reverse logistics solutions.
Valuation and projection
We project that Mercadolibre will continue its growth in 2022. This is funded by the US$1.55 billion equity offering announced in November 2021.
After a strong 2020 where share prices nearly tripled, the share price underperformed in 2021, falling by almost 25% to close the year at US$1,350. Share price then continued falling further in 2022. This leaves Mercadolibre trading at one of its lowest valuations of 8 times P/S.
3) Coupang
Coupang is frequently referred to as the ‘Amazon of South Korea.” Like Amazon, it’s the country’s e-commerce leader. It carried out a successful IPO in 2021 at $35, raising about $4.5 billion to fund its growth.
Similarities to fellow market leaders
i) Amazon
Like Amazon, Coupang has a vertically integrated business, operating its own warehouse and delivery network. Its premium subscription membership offers next-day delivery for almost all orders. It also maintains a similar business model as Coupang generates most of its sales from its first-party marketplace.
ii) Mercadolibre
Like Mercadolibre, Coupang is expanding into food and grocery delivery services to increase the attractiveness of its premium subscription.
Coupang growth and expansion
Coupang grew its revenue 62% YoY. However, the number of active users declined by 1% QoQ to 16.8 million in its most recent September 2021 filing.
Although South Korea has a population of more than 50 million, Coupang’s current network is inefficient in reaching its lower-tiered cities. Hence, it may require more spending for updating infrastructure.
With South Korea’s e-commerce revenue growth expected to slow to a single-digit growth rate in 2022, Coupang turned its focus to expansion in countries in the region. Using its IPO funds of $4.5 billion, it’s making its way into Taiwan, Singapore, and Japan.
Current valuation
Coupang’s share price has fallen significantly. It’s more than 25% below the IPO price and nearly 50% lower than its trading range in March 2021.
This translates to a P/S valuation of about 2.5 times, significantly lower than some of its competitors.
4) Alibaba
Similar to the companies mentioned above, Alibaba is the dominant player in China, its country of origin. It also has a strong presence in many Southeast Asian countries through Lazada and in Turkey through Trendyol.
Market and infrastructure expansion
With market uncertainties such as the impact of COVID-19 on consumption growth, regulatory changes, and short term global supply chain challenges, Alibaba has turned its focus to category and product expansion. It also seeks to optimise product lifetime and bring better value to customers and merchants throughout the consumer lifecycle.
i) Taobao and Taocaicai
Alibaba aims to reach the less developed areas in China by growing its bargain marketplace segment. Taobao deals provide a value proposition to the customers through a manufacturer-direct-to-consumer business model.
It is also consolidating and investing in its community marketplace business, rebranding it to Taocaicai. Taocaicai offers next-day self pick-up services for fresh groceries. This is aimed towards consumers in less developed areas.
ii) Lazada
Alibaba announced a GMV target for Lazada of US$100 billion. This is nearly five times the GMV generated by Lazada in the latest filing for its most recent 12 months.
The target comes with the expectation that South East Asia’s e-commerce market will grow by 3.3 times, from US$79 billion in 2020 to US$260 billion by 2025. This will be achieved by building a larger seller and customer base and increasing retention. In this regard, Lazada aims to provide unique value propositions and increase user engagement with live streaming.
iii) Infrastructure development
Alibaba intends to underpin this growth by expanding its infrastructure network, which is currently the 2nd largest B2C logistics network in Southeast Asia. Its own logistics network will provide long-term cost savingswhile servicing users and sellers with superior quality logistics.
Current valuation and projection
The consensus is that Alibaba is trading at trough valuations due to the events since November 2020. Should the Chinese internet sector recover, Alibaba’s growth potential may lead the entire sector’s recovery.
5) JD.com
JD.com is the second largest e-commerce platform in China and is a major competitor to Alibaba. Filings from the most recent quarter showed strong growth momentum. In fact, it gained market share at a pace that outdid Alibaba’s growth rate.
This strong growth came from higher annual active customers. JD.com’s coverage of groceries and pharmaceutical products also helped it gain market share.
The JD Mall
In September 2021, JD.com opened its first “JD MALL,” an offline store in Xi’an that offers consumers an immersive omnichannel shopping experience.
In addition to traditional electronic categories offered by JD Super Experience Store, JD MALL provides over 200,000 items from more than 150 brands. It covers a multitude of categories including home, furniture, kids, smart healthcare products, and auto accessories.
Through its partnership with furniture maker Shangpin Home Collection, JD MALL aims to meet demand for bespoke home design services among younger consumers.
Future ventures
JD.com is looking to expand its presence overseas and is in the initial planning stages, with target markets such as Vietnam and Europe. Its current presence overseas in countries such as Thailand and Vietnam are mainly through joint ventures.
Current valuation
JD.com currently trades at a valuation of less than 1.0 times P/S. It is the cheapest among the companies mentioned today and has tremendous upside potential as it is poised to continue doing well in China.
Closing statement
Investors could be concerned that the e-commerce growth engine may finally run out of steam in 2022. After all, they’ve seen two years of spectacular growth coupled with a potential reopening.
However, these e-commerce companies are aware of their potential challenges and have focused their future investments on identifying specific opportunities in their respective areas of competence. With their strong foundation and growth potential, e-commerce companies could see another year of growth and record performance.
If you’re looking to find growth stocks that could reward you in the near future, join Alvin at his next live webinar and learn how he picks growth stocks for the Dr Wealth portfolio.