Growth stocks took a beating in 2022, with the e-commerce sector bearing the brunt thanks to its cashflow-intensive business model. While e-commerce stocks were the darlings of the pandemic period, their growth seems to have fallen off a cliff as recessionary fears drive away consumer demand. With some e-commerce companies losing more than half of their market cap, it ultimately begs the question: are the best e-commerce stocks still worth investing in?
Read on as we cover everything you’ll need to know about the e-commerce sector, how industry leaders are adapting to the challenging macroeconomic environment and whether they’re in deep value territory.
What Is E-Commerce?
Electronic commerce (e-commerce) refers to the buying and selling of goods and services over the Internet. Some standout e-commerce characteristics include dynamic sales, rapid shipping and convenient payment systems.
Modern shoppers often take the convenience of e-commerce for granted. Thanks to the advent of the internet, e-commerce pioneers like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) were able to scale up their operations and achieve the record-breaking sales numbers we see today.
How Does E-Commerce Work?
E-commerce businesses rely on economies of scale to attract and facilitate the high volume of buying and selling. Typically, they require key components like payment processing, robust logistics and active marketing to make the entire shopping process seamless and attractive.
Unfortunately, with global interest rates remaining sky-high and the logistics industry recovering from its pandemic glut, these key components now act like a double-edged sword as their cost-intense nature threatens the foundation of these cash-dependent businesses.
With this in mind, it's no wonder we see Asian giants like Sea (NYSE:SE) and Alibaba (NYSE:BABA) with higher-than-average e-commerce stock valuations spike and crash through the pandemic era as they burn through their cash flow while attempting to keep operations going.
Due to China’s reopening, we’re now seeing a huge demand for online shopping services as logistics bottlenecks are expected to clear up with China relaxing its pandemic restrictions. Is this catalyst the spark that’ll reignite the e-commerce sector amid rising interest rates?
Top E-Commerce Stocks Sorted by Market Cap
According to this 2022 report about Singapore’s e-commerce market, Shopee, Lazada and Amazon are the top three e-commerce businesses.
1. Amazon (AMZN)
Amazon has come a long way since its original 1994 book retailing days. The American conglomerate has grown to a staggering one trillion-dollar market cap and now offers services beyond retail and marketplace sales.
To date, the Amazon ecosystem now includes household names like online content database IMDb, video game live streaming platform Twitch, online audiobook service Audible and supermarket chain Whole Foods Market. This has allowed Amazon to rake in more than US$500B in 2022 as its wide-stretching ecosystem allows for mass adoption and brand exposure.
From effortlessly streaming Amazon Prime Video TV shows to taking advantage of Amazon’s convenient last mile delivery, founder Jeff Bezos’ original vision of Amazon becoming everything to everyone was slowly coming to fruition. Of its various subsidiaries and acquisitions, the most profitable entity is cloud computing giant Amazon Web Services (AWS).
As one of the defacto leaders in the cloud computing space, AWS has raked in the lion’s share of Amazon’s revenue. In just 2022 alone, AWS generated about US$80B in revenue and was the key reason why Amazon stayed profitable. For reference, without taking AWS into account, Amazon would have generated US$10.6B in operating losses. It’s ultimately this argument that keeps investors bearish in the short term as Amazon continues to bleed money over time thanks to its capital-intense nature. In Amazon's defence, they have made numerous adjustments to lower their capital expenditure, with the most drastic measures being their massive 18,000 layoff and 50% salary cut.
Despite losing 36% of its value in 2022, many growth investors still have Amazon at the top of their mind when considering the best e-commerce stocks. Its global reach, diverse ecosystem and explosive growth potential remain attractive to investors seeking to invest in the e-commerce sector.
2. Alibaba (BABA)
Although the Chinese e-commerce titan was once given the title “Amazon of China”, its solid fundamentals have been undermined in recent times.
Thanks to a combination of government interference, delisting fears and escalating US-China tensions, Alibaba’s public image has been crippled as geopolitical risk remains a key bearish catalyst that weighs on its e-commerce stock valuations.
The rise of Shopee also marked a decline in market share for Lazada, the Southeast Asian e-commerce operator backed by Alibaba. This dampened the otherwise stellar fundamentals of Alibaba as they struggled to quell fears and uncertainty associated with its Chinese background.
Despite all this negativity, there is light at the end of the tunnel. Alibaba’s Q4 sales grew by 2% even though China’s zero-Covid policy paralysed much of the business’ operations. Also, the Chinese government seems to be softening up on its big tech crackdown as officials take up “golden shares” and align business decisions with the government’s goals to prevent future conflicts.
With China’s much anticipated reopening, bullish investors are expecting Alibaba’s strong fundamentals to shine through as their ample US$11.8B in free cash flow and attractively low PE ratio of about 13 remain a talking point among value-seeking growth investors.
Thanks to the excitement behind China’s reopening, 2023 seems like a good start for Alibaba’s share price as it hovers in the US$200B valuation area. Only time will tell if Alibaba can reclaim its title as one of the best e-commerce stocks as it continues to brave the storms of political risk and increasingly stiff competition from its Chinese and Southeast Asian e-commerce markets.
3. Sea (SE)
Anyone who shops online in Singapore will be familiar with Shopee’s growth story. It's an e-commerce platform that falls under Sea, the tech conglomerate that houses SeaMoney and Garena.
Things came to a head for Sea’s growth in 2018 when Shopee aggressively marketed their brand. After securing the rights to Pinkfong's Baby Shark jingle and enlisting the services of Cristiano Ronaldo, awareness of the brand spread like wildfire and ignited Shopee's meteoric growth.
Its high Gross Merchandise Value combined with Garena's massive revenue generation made for a quick path to profitability as Sea managed to increase their revenue by 10-fold in five years.
By 2020, the pandemic happened and allowed Sea to finally achieve profitability after years of being in the red, causing Sea's stock price to explode.
Unfortunately, growth of this magnitude would not last in a post-pandemic environment. To take advantage of its escalating growth, Sea made the decision to push the envelope and expand in what was considered by experts to be uncharted waters.
From Mexico to India, Sea attempted to replicate its growth story in similar markets but came up short thanks to unfavourable macroeconomic conditions and tough opposition from established leaders like MercadoLibre and Amazon in these regions. By late 2021, it was clear that Sea would be unable to sustain its astronomic growth and they began cutting their losses by shuttering regional branches in favour of cost-cutting.
Although Sea is down more than 80% from its highs, senior management remains optimistic. As seen from its quarterly earnings calls, the company has learnt from its rapid expansion mistakes and is back to strengthening its core fundamentals and tidying up its balance sheet before once again embarking on expansion ambitions. All in all, this positive outlook makes SE a prime watchlist target for best e-commerce stocks.
The Bottom Line
Uncertainty aside, 2023 bodes to be a pivotal point for many of the best e-commerce stocks. As interest rates continue to rise in the face of stubborn inflation, fundamentals will be key for these e-commerce companies as their capital-intense business model will weigh down on their balance sheet if left unchecked.
Want to know how the Singapore government manages inflation in 2023? Read up on our Singapore Budget 2023 summary for more information. Alternatively, if you’re keen on reading up about the bullish rebound from China’s reopening, check out our travel stocks article for more insights.