Online Retailers’ Successes and Shortcomings Ahead of the Holiday Season
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three retail stocks that are heavily present online, each facing their own challenges and building from this year’s successes. For investors focused on opportunities in this industry, should you consider these three retail stocks of Amazon.com Inc., Alibaba Group Holding Ltd. and Walmart Inc.?
Online Retail Stocks Recent News
Retailers have been the focus of news outlets as of recent, with many reporting that empty shelves are to come for this holiday season due to the strained supply chain. Additionally, with inflation reaching a 30-year high and increasing 6.2% from a year ago (the most since December 1990), prices have increased ahead of the busy season, while consumer demand has not slowed. With that said, retailers have found success in the form of online sales leading up to the holidays this year, and e-commerce has never been more crucial to consumers.
The most recent success comes from China’s Singles Day shopping event, a multi-day extravaganza ending on November 11. Despite worries about the strength of Chinese consumer spending and Beijing’s technology company crackdown, Alibaba reported gross merchandise volume of $84.5 billion over the 11-day period, representing an 8% increase from last year’s figures. Competitor JD.com saw a 28% increase from the prior year’s numbers. These results show that Chinese consumers have a large desire to shop on these e-commerce giants’ platforms.
It is likely that these Chinese platforms will expand internationally, hoping to rival Amazon and other U.S. e-commerce leaders. Amazon has experienced great success in its own regard. In June, Amazon held its annual Prime Day, in which merchants’ sales grew more than its first-party retail business. Sellers netted $1.9 billion from pre-Prime Day promotions that gave customers discounts for shopping with small businesses. While Prime Day sales are historically not disclosed, Adobe Analytics estimated e-commerce sales surpassing $11 billion. Amazon sold $10.4 billion worth of goods on Prime Day (in mid-October) last year, up 45.2% from $7.16 billion in 2019. The muted growth this year was, as with many other lower-than-expected figures, attributable to supply chain disruptions.
To counteract these supply chain issues, retailers have begun to conduct sales ahead of Black Friday and Cyber Monday. While these two shopping-frenzied days are likely to bolster sales, Amazon and Walmart rolled out early deals in October to hook holiday shoppers, and with the most successful shopping holidays arriving in under two weeks, it will be interesting to see how consumers react.
For Cyber Monday in 2020, shoppers spent $10.8 billion, and rose 15% year over year according to Adobe Analytics, which analyzed website transactions from 80 of the 100 top U.S. online retailers. For many retailers in 2020, Cyber Monday and Black Friday — a one-day event that’s typically centered around stores and malls — had diminished roles because companies started their deals in mid-October, so shoppers spread their purchases over a longer period.
Another thing of note is how firms with a gigantic store presence, such as Walmart and Target, have adapted to meet the success of e-commerce companies. A year ago in September, Walmart launched Walmart+, a subscription service that includes perks such as free grocery deliveries, reduced prescription prices and online shipping. Since that launch, they have reached over 32 million members, and the momentum has been attracting younger, higher-income shoppers.
Overall, there are many factors at play regarding the success of e-commerce and in-person stores, largely focused on a firm’s ability to adapt to supply chain issues, meet high demand, pass along higher prices and build or cement an online presence. The global supply crisis not only affects the U.S., but also retailers in China. It is likely that going into 2022, these issues will persist. Businesses must continue to entice customers, and ahead of the holiday season, prepare accordingly to provide consumers with what they want if they want to increase sales.
Grading Online Retail Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three online retail stocks — Amazon, Alibaba and Walmart — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Online Retail Stocks
What the A+ Stock Grades Reveal
Amazon.com Inc. (AMZN) is a leading online retailer that offers a range of products and services through its websites and is one of the highest-grossing e-commerce aggregators, with $386 billion in net sales and approximately $482 billion in estimated physical/digital online gross merchandise volume, or GMV, in 2020. It operates through three segments: North America, international and Amazon Web Services (AWS). The company’s products include merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. It also manufactures and sells electronic devices, including Kindle, Fire tablet, Fire TV, Echo, Ring and other devices, and it develops and produces media content. Retail-related revenue represented approximately 83% of the total, followed by AWS cloud computing, storage, database and other offerings (12%) and advertising services and cobranded credit cards (6%). AWS offers a set of technology services, including storage, database, analytics, machine learning, Internet of Things and cloud and serverless computing. International segments constituted 27% of Amazon’s non-AWS sales in 2020, led by Germany, the U.K. and Japan.
Earnings estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of D, which is considered negative. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
The company reported a negative earnings surprise last quarter of 31.4%, and two quarters ago reported a positive earnings surprise of nearly 23%. Over the last month, the consensus earnings estimate for the third quarter has decreased from $12.34 to $3.64 per share based on 36 downward revisions. Three months ago, the consensus earnings estimate was $12.51 per share. These revisions are likely coming from supply shortages highlighted in the third-quarter earnings report and the $2.80 per share miss on that quarter’s earnings estimate.
Amazon has an A+ Growth Grade of B. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported third-quarter revenues of $110.8 billion, up just over 15% from $96.1 billion in the year-ago quarter. The company reported quarterly diluted earnings per share of $6.12. Amazon does not currently pay a dividend.
Amazon has a Momentum Grade of D, based on its Momentum Score of 38, which is weak.
Alibaba Group Holding Ltd. (BABA) is the world’s largest online and mobile commerce company, measured by GMV of $1 trillion for the fiscal year ended March 2020. It operates China’s most-visited online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 69% of revenue in the December 2020 quarter, with Taobao generating revenue through advertising and other merchant data services and Tmall deriving revenue from commission fees. Additional revenue sources include China commerce wholesales (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (7%), digital media and entertainment platforms (4%), Cainiao logistics services (5%) and innovation initiatives/other (2%).
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Alibaba has a Quality Grade of B. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its return on assets and return on invested capital, ranking in the 84th and 74th percentile of all U.S.-listed stocks, respectively. However, it ranks poorly in terms of its change in total liabilities to assets, putting it in the 27th percentile.
Alibaba has a Momentum Grade of F, based on its Momentum Score of 9, and a strong Growth Grade of B. The company does not currently pay a dividend.
Walmart Inc. (WMT) is America’s largest retailer by sales. Walmart operated over 11,400 stores under 54 banners at the end of fiscal 2021, selling a variety of general merchandise and grocery items. Its home market accounted for 78% of sales in fiscal 2021, with Mexico and Central America (6%) and Canada (4%) its largest external markets. In the U.S., around 56% of sales come from grocery, 32% from general merchandise and 10% from health and wellness items. The company operates several e-commerce properties apart from its eponymous site, including Flipkart and Shoes.com (it also owns a roughly 10% stake in Chinese online retailer JD.com). Combined, e-commerce accounted for about 12% of fiscal-2021 sales.
Walmart has a Value Grade of C, based on its Value Score of 46, which is considered to be average. The company’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 15 for the price-to-sales ratio, 19 for shareholder yield and 46 for the enterprise-value-to-EBITDA ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings, price-to-free-cash-flow and price-to-book ratios.
Walmart has a Momentum Grade of F, based on its Momentum Score of 20. This means that it ranks in the bottom tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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