A key question for investors eyeing the eCommerce space is one of whether the pain in the sector is finally coming to a close.
After significant declines through the first half of 2022, many of those already invested in the space will certainly hope so. For example, high-multiple internet retail names like Chewy (NYSE:CHWY), Wayfair (W), Stitch Fix (SFIX), Etsy (ETSY), ThredUp (TDUP), and Farfetch (NYSE:FTCH) have all fallen more than 50% since the start of the year as inflation and supply chain issues pressure the industry. For the likes of Poshmark (NASDAQ:POSH) and Revolve (RVLV) the trend has only been marginally better.
In recent years, such a significant drop would likely have inclined dip buyers to snap up the shares. Yet, as worries of a recession rise, there may be reason to worry pain is only set to persist in the sector. At the very least, analysts advise being very selective.
Too Early to Tell?
Uncertainty is the word of the moment and for eCommerce this is certainly no different. This is precisely why Morgan Stanley is telling clients it’s simply too early to call a bottom on the beleaguered sector.
As consumers deal with rising inflation, led by surging gas prices, demand is likely to slow from its peak. That weakening consumer only adds to waning pandemic trends, especially in terms of online purchases. Additionally, the bloated inventory levels of brick and mortar retailers like Target (TGT) have been cited as likely to ignite price competition at the same time margins come under increased pressure.
“Most stocks likely have not bottomed,” Morgan Stanley analyst Lauren Schenk wrote in a recent note to clients. “We are concerned most about those business models that have high apparel and home exposure, especially those that own/carry inventory given rising inventory levels and imports across the channel coupled with slowing demand.”
She added that second half estimates, while already depressed, likely remain too high for many of the eCommerce industry’s most popular stocks. Schenk cited Etsy (ETSY), Wayfair (W), Stitch Fix (SFIX), and Revolve Group (RVLV) as glaring examples. A lack of profitability for many of these stocks is likely to add to general unfavorability in the current market environment as well, Schenk surmised.
She noted her particular trepidation about Etsy (ETSY), Stitch Fix (SFIX), and Wayfair (W).
“While select eCommerce names appear de-risked from a valuation and estimates perspective, we think it’s still too early to step in on most,” Schenk concluded.
To be sure, Schenk’s team was clear in commenting that it is too early to step in on “most” eCommerce names rather than all.
In a detailed analysis, the team outlined the essential reasons for why each stock had fallen from 2019 levels. In the end, the rationale came to essentially two factors: overvaluation or a weaker competitive position. The former was cited as the far more common catalyst to drawdowns as of late.
Yet, Schenk’s combined analysis alongside he colleague Brian Nowak noted that the indiscriminate nature of recent selloffs have created “dislocations” that offer significant opportunity. Most prominently, Farfetch (FTCH), Chewy (CHWY), Match Group (MTCH), and Poshmark (POSH) were considered attractive at present.
“We like [Farfetch] FTCH for its lower inventory risk, reset numbers, accelerating ’23 GMS growth, and higher income exposure which tends to be more resilient in a downturn, and [Chewy] (CHWY) for investors with longer-term horizons given recent performance versus fundamentals, consumables exposure, strong cohort economics, and secular growth,” the team explained. “ [Poshmark] (POSH) also appears to have reset numbers with our forecasts assuming a -10% deceleration in [the second half of 2022].”
While Schenk clarified that Poshmark is a “show me” stock with a “Neutral” equivalent rating given an unfavorable macroeconomic backdrop, it remains a more compelling play than most in eCommerce. Elsewhere, Match Group (MTCH) was noted as the bank’s top smid-cap pick despite it not fitting comfortably into the broader review of eCommerce stocks. Rent the Runway (RENT) was also “Buy” rated, rounding out bullish expectations for the sector at the bank as the path ahead grows more uncertain.
Read more on the recent results from and raised expectations for Rent the Runway.