Online retailers aren’t on 2022 holiday wish lists

Bloomberg

E-commerce stocks have struggled this year, and plenty of investors are doubtful the holiday shopping season will provide a catalyst to turn things around.
Online retailers such as Wayfair Inc. and Etsy Inc already are under pressure from the loss of pandemic-era tailwinds and economic weakness weighing on consumer sentiment. Now, some analysts are fretting that high inventories will spur sites to offer big discounts to move merchandise, weighing on earnings at a time when investors are focused on profitability.
The Amplify Online Retail ETF has dropped 55% this year, including a 1.2% drop, compared with a decline of 35% in the broader SPDR S&P Retail ETF and a 33% retreat for the Nasdaq 100 Index. Both Wayfair and Shopify Inc., which provides infrastructure for e-commerce companies, have collapsed more than 80%, and both closed at multiyear lows. Etsy has dropped 51%, eBay Inc. is down 44% and Amazon has lost a third of its value.
Even after those declines, online retailers are still expensive relative to their past valuations or to the market at a time when the Federal Reserve is aggressively raising interest rates to combat inflation, a headwind to multiples. Wayfair trades at nearly 98 times estimated earnings, and both it and Shopify are unprofitable, putting them out of favour at a time when market participants are gravitating towards companies with earnings.
Both Etsy and Amazon are below their long-term average valuations, but at 32 and 40 times earnings, respectively, they’re more than double S&P 500 Index’s multiple of 15.3. Analysts predict Amazon’s revenue will rise 11% this year while Etsy’s growth is seen slowing to 6.2% from 35% in 2021.
“There’s still a lot of risk and e-commerce stocks are still pretty expensive,” said Lamar Villere, partner and portfolio manager at Villere & Co. “We don’t see anything attractive, as it remains a high-multiple sector at a time when growth has slowed.”
Analysts are also pulling back their expectations: The average estimates for full-year revenue at Etsy, Wayfair and Shopify are down 9.2% or more over the past six months.
“The environment for online retailers isn’t as good as it was, but Amazon has the balance sheet heft that can help it endure an economic slowdown,” said Jack Ablin, chief investment officer at Cresset Capital. “If you’re a long-term investor, Amazon’s weakness could look like an opportunity.”
The S&P 500 tech sector index has dropped 32% in 2022, as of its last close, a steeper decline than the 24% drop of the overall benchmark index. This year is on track to be the first one since 2013 where tech has underperformed, and the degree of underperformance is the biggest since 2002. The sector has been pressured as rising rates weigh on valuations, and as investors rotate into value strategies over growth.