Online Retailers May Not Get a Holiday Boost

With rising inflation undercutting consumer spending, this holiday season may not be the catalyst to jumpstart sales for struggling E-commerce stocks.  Moreover, online retailers are already reeling from the loss of pandemic-era sales, and some analysts are worried that high inventories may spur the retailers to offer big discounts to move merchandise, which may weigh on earnings. 

The holiday shopping season gets an unofficial kickoff today with Amazon.com’s two-day “early-access” sale. Adobe Analytics predicts U.S. online holiday sales to increase 2.5% this year, well below last year’s 8.6% pace. Washington Crossing Advisors said, “this will be a weaker holiday season, and deceleration in online retail growth will have a meaningful impact on valuations as investors recalibrate their expectations.”

Wayfair (W) and Shopify Inc. (SHOP), which provide infrastructure for e-commerce companies, have plunged more than 80% this year and closed at multiyear lows Monday.  Also, Etsy (ETSY) has dropped 50%, eBay (EBAY) is down 44%, and Amazon.com (AMZN) is down 33%.  The Amplify Online Retail ETF has dropped 55% this year, compared with a 36% fall in the broader SPDR S&P Retail ETF and a 33% decline in the Nasdaq 100 Stock Index ($IUXX) (QQQ).

Despite the sharp decline in stock prices, online retailers are still expensive relative to their past valuations.  Also, the action by the Fed to aggressively raise interest rates is a headwind to stock multiples.  Wayfair trades at nearly 98 times estimated earnings, and both it and Shopify are unprofitable, keeping them out of favor when investors are gravitating toward companies with earnings.  Etsy is at 32 times estimated earnings, and Amazon.com is 40 times, below their long-term average valuations but more than double the S&P 500 Indexes’ multiple of 15.3.

Analysts continue to pull back their earnings expectations for online retailers.  The average estimates for full-year revenue at Etsy, Wayfair, and Shopify are down 9.2% or more over the past six months.  Villere & Co said, “there’s still a lot of risks, and e-commerce stocks are still pretty expensive.  We don’t see anything attractive, as it remains a high-multiple sector at a time when growth has slowed.”

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