With consumers increasingly relying on more convenient ways to make purchases, eCommerce companies are looking to capitalize on this expanding market. The Commerce Department reported in February that for the first time in history, monthly online U.S. retail sales surpassed general merchandise sales to reach $59.8 billion. With this figure only expected to grow, Wall Street is taking notice.
Stifel Nicolaus’ Scott Devitt believes the pattern of shoppers switching to online versus traditional in-store purchases will persist, upgrading both Etsy (ETSY) and Wayfair (W) to a Buy on August 22. He tells investors that the dip in each company’s shares represents a compelling opportunity as both stand to benefit from the eCommerce boom.
Let’s take a closer look at what the five-star analyst had to say about these two stocks.
Etsy Inc. (ETSY)
The handmade and vintage merchandise retailer has had a rough going since its Q2 earnings release, with shares falling 23% in the last month. That being said, Devitt upgraded the stock based on the attractive entry point created by the drop, deeming Etsy an “emerging leader in third-party e-commerce”.
On August 1, Etsy reported that while it had beaten the consensus estimate for earnings, it fell short in terms of revenue. However, management did raise its full year guidance citing new initiatives that are expected to drive upside for the company.
As part of these efforts, Etsy signed a definitive agreement on July 21 to acquire Reverb, a marketplace for new, used and vintage music equipment for $275 million in cash. The company also started giving vendors tools and support to help them guarantee free shipping on orders of $35 or more to U.S. buyers in July.
Not to mention Etsy plans to launch a simplified ad platform for sellers beginning in the third quarter of 2019. Promoted listings, on-site ad platform and Google Shopping will be streamlined into a single ad platform called Etsy Ads where sellers can set a budget and allow Etsy to optimize between channels, targeting a return on spending.
Devitt tells investors that all of these positive developments make up for a somewhat weaker quarter. “While we had been surprised at the strength and speed of the turnaround, we have been fans of the strategy throughout and feel now is a good time to put the appropriate rating on the business for the extensive improvements that have been built into the model to deliver over the long term,” he explained. As a result, the analyst upgraded the rating from a Hold to a Buy and kept a $70 price target, implying 31% upside.
All in all, the Street takes a slightly more cautious stance on Etsy. It has a ‘Moderate Buy’ analyst consensus and a $75 average price target, suggesting 40% upside potential.
Wayfair Inc. (W)
The online furniture retailer took a similar tumble following its earnings release, with shares dropping 19% in the last month. Again, Devitt tells investors not to fear as this stock’s strong long-term growth narrative remains unchanged.
The company posted a second quarter earnings and revenue beat on August 1, but disappointed investors with its third quarter guidance that fell below analysts’ estimates. Devitt notes that this was caused by an investment in its international operations that offset acceleration in its U.S. business.
He instead based his upgrade on W’s steps in the right direction that are expected to fuel growth.
Wayfair remains on track to add almost 5 million square feet of space to its logistics footprint this year, expanding upon the existing 12 million square feet. Adding to the good news, its CastleGate warehouse penetration in the U.S. continues to rise. At the current pace, cash flowing through CastleGate for both large and small parcel are doubling year-over-year.
All of this lends itself to Devitt’s conclusion that Wayfair stock is undervalued. “The drop in the company's stock price since the release of its second-quarter results has created a compelling entry point,” he explained. He added that W now trades at a 25% discount to the company's e-commerce competitors. As a result, Devitt upgraded the stock from a Hold to a Buy and maintained the $150 price target. The analyst believes shares could surge 39% over the next twelve months.
In general, Wall Street approves of this eCommerce stock. 7 Buy ratings vs 3 Holds received over the last three months add up to a ‘Moderate Buy’ analyst consensus. Wayfair’s $160 average price target suggests 48% upside potential.