Zacks Industry Outlook Highlights PDD Holdings, Rover Group and ACV Auctions
For Immediate Release
Chicago, IL – June 22, 2023 – Today, Zacks Equity Research discusses PDD Holdings Inc. PDD, Rover Group, Inc. ROVR and ACV Auctions Inc. ACVA.
Industry: E-commerce
Link: https://www.zacks.com/commentary/2111386/3-picks-from-a-strengthening-e-commerce-industry
This year is likely to see a return to normalcy with ecommerce taking away bigger and bigger slices of the total retail pie. Commerce Department numbers for the last quarter are proof of this: ecommerce sales in the first quarter grew 7.8% over 1Q22 (up 3.0% sequentially), with total retail sales increasing 3.4% (up 0.9% sequentially). Ecommerce accounted for around 15.1% of total U.S. retail sales.
As the back-to-stores trend recedes, convenience is returning as a major factor driving volumes in this industry, and this is particularly true of Gen-Z, which is becoming a more relevant component of sales. Many of these buyers have grown up on the Internet and are accustomed to a much higher level of digitization. They are also likely to hang out on popular social media platforms, allowing themselves to be influenced by the latest trends there. This is driving an entirely new perspective on the ecommerce space, one that is likely to expand with more advanced technology such as AR/VR and the Metaverse.
Valuation, although down over the past year, remains prohibitive, reflecting the relatively stronger growth prospects. Several stocks in this extremely diverse industry are worth buying today, but we’ve picked three: PDD Holdings, Rover Group and ACV Auctions.
About The Industry
Internet - Commerce continues to evolve as the technologies driving it advance.
On the one side are increasingly powerful and capable user devices. On the other are sophisticated, AI-enabled software platforms facilitating transactions that are more capable of delivering user satisfaction. Social commerce and "chatbots" are further facilitating things.
Differentiation comes from better technology for improved showcasing, easier navigation and payment, speedier delivery and returns, brand building, comparison shopping, loyalty, etc., as well as more shipping options, which generally tip the scales in favor of larger players. Particularly because there is fierce price competition necessitating deep discounting, which keeps prices down.
Current Trends Driving the Internet-Commerce industry:
Macro conditionsshould continue to improve for the industry, which has been pressured over the past year by a combination of factors, including a consumer trend back to physical stores, as well as generally tighter purse strings as people fret about rising costs and the possibility of a recession that would see significant job losses. In 2023, it’s clear that inflation (including wage inflation) is coming down (however slowly), although job openings remain pretty decent and unemployment remains at historic lows. The only thing supporting the recession theory is the Fed’s hawkish commentary. Therefore, people continue to move back to the convenience of online shopping. For producers, supply chain issues have alleviated while the labor situation is still tight. Global uncertainties continue to affect foreign exchange effects for companies with international operations. The higher interest rate is another pressure on producers, and by extension consumers, which is another negative for the year. Overall, industry players will continue to see the benefits of operating leverage they have built up in the last few years. The importance of having a digital presence has never been greater, particularly considering the fact that the retail ecommerce market continues to expand into new product segments and geographies.
Ecommerce will continue to gain at the expense of brick-and-mortar this year. The Commerce Department’s data for the first quarter shows that ecommerce growth continued at a faster pace than overall retail for the third straight quarter and it has even gained a bit of market share to level with the year-ago quarter. Therefore, this year is shaping up to be a relatively normal year, which means that ecommerce will continue to grow at the expense of physical stores.
Ecommerce growing at the expense of physical stores doesn’t mean that a physical presence will be downgraded. In fact, with Gen Z, the demand for convenience and options will remain paramount. In many cases, this will mean faster deliveries or pickups from some nearby convenient location. Since it is only proximity to a consumer that can facilitate quick delivery, both ecommerce pureplays and traditional retailers will continue to balance ecommerce sales with a physical presence. Therefore, a hybrid/omnichannel model will remain of utmost importance, allowing customized, quick and convenient delivery (BOPIS, curbside pickup) through apps. Customers generally downgrade stores that don’t provide these conveniences. Self-driven delivery vehicles and drones are also on the horizon to deal with logistics problems and make deliveries smoother and cheaper.
A trend that Gen-Z is popularizing now is social commerce. Social commerce means the ability to discover, research, buy and checkout on a social media platform. Brands usually have store fronts on these platforms where influencers also discuss their products, thus driving traffic to them. The social element of shopping that ecommerce had taken out is thus returning through this route. Since social commerce is already popular in China, it isn’t surprising that the Chinese social media platform TikTok -- that’s also very popular with Gen Z -- is the number one place for social commerce. But others, like Facebook and Instagram, are also in the game. According to The Future of Commerce, “Global sales via social media platforms were estimated at U.S. $992 billion in 2022, and forecasts suggest that social commerce sales will reach around U.S. $2.9 trillion by 2026. Social commerce is critical for brands to reach their target audiences, and is expected to generate $30.73 billion in sales in 2023, accounting for 20% of global retail e-commerce.” Other trends online retailers are focused on include grocery sales and the buy-now-pay-later option.
Also, data mining has never been easier. Because of the many details involved in satisfying a customer, data mining has grown in importance over the years, with the party controlling the customer’s data being best positioned to identify and service demand while also delivering the desired experience. Most of the big ecommerce players are also into payments processing, which gives them further insight into a customer’s tastes, preferences and buying habits. As machines read and process this data, they can create programs and processes to maximize customer satisfaction, drive sales and minimize returns. Artificial intelligence such as that used by companies like Amazon already decides how competitive a player is.
Zacks Industry Rank Reflects Relative Strength
The Zacks Internet - Commerce Industry is a rather large group within the broader Zacks Retail And Wholesale Sector. It carries a Zacks Industry Rank of #84, which places it in the top 33% of 250+ Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates relatively positive near-term prospects.
The industry’s positioning in the top 50% of the Zacks-ranked industries is the result of its relative performance versus others. What we’re seeing in the aggregate estimate revisions is significantly weaker earnings than a year ago. Since October, they’re down about 6 cents, indicating that the return-to-store trend is stabilizing. For the year, the aggregate earnings estimate for 2023 is down 38.4% and for 2024 is down 23.3%.
March is a seasonally soft quarter but both revenue and profitability continue to improve year on year as supply chain and labor issues are easing. Given the Fed’s hawkish stance, a recession is looking increasingly likely, especially since employment numbers are softening slightly and price inflation is still well above the Fed’s target.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags on Shareholder Returns
Although it had been trading more or less in line with the broader Zacks Retail and Wholesale sector earlier, the Zacks Electronic Commerce Industry dropped sharply last October and has lagged both the broader sector as well as the S&P 500 index since then.
Therefore, we see that the stocks in this industry have collectively gained 9.2% over the past year, compared to the broader Zacks Retail and Wholesale Sector, which gained12.1% and the S&P 500, which gained 17.2%.
Industry's Current Valuation
On the price-to-forward 12 months’ earnings (P/E) basis, the industry still looks grossly overvalued (33.60X) with respect to both the S&P 500 (19.54X) and the broader retail sector (22.87X).
On the basis of forward sales (P/S) for the year, however, the shares look reasonably valued, although above their median level over the past year. They’re trading at a discount to the S&P 500’s 3.71X (also above its median value). Over the past year, the industry has traded as high as 1.65X, as low as 1.24X and at the median of 1.41X.
3 Stocks Worth Considering
While the industry’s valuation looks kind of prohibitive, there are quite a large number of stocks that are currently ripe for the picking. That’s because of the significant variety that exists in this industry in terms of lines of business, business model, location, and so forth. Of the three stocks discussed below, PDD and ROVR carry a Zacks Rank #1 (Strong Buy), while ACVA carries a Zacks Rank #2 (Buy):
PDD Holdings Inc.: Dublin, Ireland-headquartered PDD is a multinational commerce group that owns and operates Pinduoduo. The e-commerce platform offers products in various categories, including agricultural produce, apparel, shoes, bags, mother and childcare products, food and beverage, electronic appliances, furniture and household goods, cosmetics and other personal care, sports and fitness items, as well as auto accessories in China. It also owns an online marketplace called Temu which is targeted at international markets.
PDD is a relatively new company, building its market through well-planned investment. Management expects these R&D investments to generate efficiency within the business and uncover new opportunities in the market. The company is focused on the agriculture segment and supply chain innovation and has a very large number of users in China. Its international business is also focused on catering to the basic needs of customers. The success of this strategy is seen from its solid top and bottom-line results, as well as its history of positive surprises.
In the last 30 days, analysts have raised PDD’s 2023 (ending March) estimates by 21 cents and 2024 estimates by 9 cents.
The shares have gained 17.9% over the past year, a testimony to the increased investor confidence.
Rover Group, Inc.: Seattle, WA-based Rover Group operates an online marketplace for pet care worldwide. It connects pet owners with businesses offering various pet care services, including overnight services like boarding and in-home pet sitting, as well as daytime services like daycare, dog walking, drop-in visits, grooming and training.
Rover reported strong results in the last quarter that was driven by strong revenue and bookings growth as well as expense control. Through its support services, the company seeks to offer increased value and improved experience to customers through their lifetimes. Customer retention should help expense control and boost profitability. The expansion of the product portfolio and momentum in international markets are other growth drivers.
In the last 60 days, the Zacks Consensus Estimate for 2023 has gone from -$0.01 to $0.02. For 2024, they’re up from 0.01 to $0.03. Analysts expect earnings growth of 113.3% in 2023 and 66.7% in 2024.
The Zacks Rank #1 stock is up 18.2% over the past year.
ACV Auctions Inc.: Based in Buffalo, NY, ACV Auctions operates a digital marketplace connecting buyers and sellers of wholesale vehicles on auction. The company provides support services like data-based insights into the condition and value of used vehicles, as well as customer financing services.
Management has talked about early signs of end-market recovery and continued share gains on the back of a broad suite of solutions and a robust dealership network. These factors should in combination drive the company’s revenue. Efficient cost management should drive the bottom line. Management is optimistic about ACV remaining well positioned to deliver sustainable growth in a recovering end market, while also scaling the business model.
In the last 60 days, analysts have lowered their 2023 loss estimates by 9 cents and their 2024 earnings estimates by 14 cents. They are extremely optimistic about the company’s growth prospects.
The shares are up 151.5% in the past year.
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