Has e-commerce’s dazzling run come to an end?

Positive vaccine developments over the past fortnight have sparked a sell-off in e-commerce stocks as investors shift their thinking to life outside lockdown.

Last week’s announcement that Pfizer’s vaccine showed 90 per cent efficacy provided a much-needed reality check for the e-commerce darlings’ lofty valuations according to Portfolio Manager at Cyan Investment Management, Dean Fergie.

“When stocks go on a massive run buoyed by strong fundamentals, people lose sight of valuations, so you need a circuit breaker to make investors reassess the valuation of stocks,” he said.

“Everyone was focused on the US election and then the vaccine news happened. People realised life will go back to normal and these e-commerce businesses won’t be the only source of people’s spending – the pullback has been aggressive but justified.”

The market’s correction has hit some of the ASX’s best performers this year with Kogan.com down 20 per cent, Temple & Webster 17 per cent and Breville Group nearly 10 per cent (at time of writing) since Pfizer’s announcement last week.

Investors were quick to jump on e-commerce stocks earlier this year with COVID lockdowns providing a “perfect storm” which put a rocket under their valuations.

“There were huge tailwinds for these e-commerce stocks because brick and mortar stores were closed, their margins increased as their cost base lowered and a lot of people were at home with government handouts and money to spend,” Fergie said.

Perfection was priced into e-commerce stocks but now that restrictions are easing and normality is in sight, Fergie’s called time on e-commerce’s dazzling run.

“It’s been such a prolonged share market run that it’s hard to see their valuations getting more extended than they are now,” he said.

“I don’t see any other structural or additional tailwinds to benefit the sector – most of us have been locked down with the government throwing money at people to keep them spending. I only see things getting harder than easier for e-commerce companies.”

It spells trouble for the rush of e-commerce initial public offerings (IPOs) that have listed on the back of investors’ captivation with the online shopping theme.

The next wave of e-commerce companies hitting the ASX boards have been unrealistically pricing themselves based on the performance of more experienced e-commerce stocks according to Fergie.

“A lot of these e-commerce IPOs are priced too high – look at Adore Beauty which priced itself based on Temple & Webster and MyDeal compared itself to Kogan.com.

“These are stocks that have gone up 10 times this year, real top of the market stocks, so I can understand why these IPOs are struggling in the aftermath” he said.

Indeed, Adore Beauty which was valued upon listing at $635 million, or 96 times forward earnings, saw its share price increase just 2.5 per cent on its ASX debut before dropping 16 per cent on its second day of trading. Its current $6.41 share price remains below its $6.75 offer price.

Zebit, which is an e-commerce platform with a built-in buy now pay later offering, saw its share price tank 34 per cent on its debut. While it has slightly recovered, its current share price of $1.14 remains well below its listing price of $1.58.

While online marketplace MyDeal is currently trading slightly above its $1 offer price, it’s been on a downward trajectory since a 75 per cent jump on its opening day of trading. Since then, it’s dropped 30 per cent and is in danger of dropping below its listing price.

An overreaction?

Those working behind the scenes of the online shopping boom believe, perhaps unsurprisingly, that the market sell-off was an overreaction and there’s still plenty of gas left in the e-commerce tank.

Leigh Williams is the chief executive of eStore Logistics which delivers more than 20 million orders per year for the likes of Kogan.com, Temple & Webster and Patagonia, and from what he’s seeing, online shopping is continuing to grow rapidly even as brick and mortar stores open up.

“When I look at the volumes going through our distribution centres, we’re smashing existing records every month off the back of existing customers and new clients,” Williams said

“Even as the country has been opening up in states other than Victoria, we’re continually holding strong year-on-year increases of over 100 per cent in terms of number of units shipped to customers.”

The acceleration of online retail penetration in Australia from around 8 per cent pre-pandemic to now sit around 13 per cent is still well short of the 30-plus per cent boasted by the UK. This, according to Williams, means there’s still plenty of room for e-commerce companies to grow in the Australian market.

While admitting it’s imprudent to think online retail numbers can sustain the levels seen during lockdowns, Williams insists that consumers have now opened their eyes to the convenience of online shopping, and this will allow Australia to catch those overseas markets.

“Over the past few years in Australia, e-commerce has been all about competing on price, but convenience is now becoming a much more important factor in online shopping – people aren’t wanting to drive to a shopping centre, find a park, get annoyed by a pushy sales assistant,” Williams said.

“As we’re seeing logistics in Australia improve, we’re also going to see more of that shift in online penetration.”

One of the key issues that investors have with the valuation of e-commerce stocks is that many are running on marginal profitability or are even loss making.

As Williams points out however, the expansion of private label products is allowing e-commerce companies to cut costs and increase margins as they chase higher profits.

This has been the case for Temple & Webster and Kogan.com, and now fresh-faced MyDeal is following suit, and Williams believes it is “perfectly placed” to benefit from the e-commerce revolution and the higher margin gains from its private label strategy.

“I still think there’s massive growth ahead for these e-commerce stocks. I see the way they operate, how smart they are, and their ordering patterns and I truly believe the market sentiment (sell-off) is a bit of an overreaction.”

Out with the new, in with the old

It’s been a case of out with the new and in with the old as the money rotating out of e-commerce stocks flows into the more traditional value stocks.

Owner of Westfield shopping centres, Scentre Group, has seen its share price jump 35 per cent in November after being smashed throughout the year. Similarly, Chadstone owner Vicinity Centres has risen 37 per cent this month.

Investors are also seeing the light at the end of the tunnel for travel stocks, with Sydney Airport rebounding 26 per cent in November, Webjet nearly 50 per cent and Flight Centre 44 per cent.

The aggressive momentum swing is part of what Fergie describes as a “snowball effect” brought on by swarms of investors jumping on the next theme and sector as they chase capital gains.

“Everyone’s trying to find the next leg up and way to make money and the vaccine news came as a bit of a surprise to investors who begun to think things will get back to normal,” he said.

“You get this snowball effect where news that benefits those value stocks comes through, day traders get in there, there’s sector allocations towards those stocks and there’s a virtuous circle.”

Having been in the game for decades, Fergie said that the amount of volume being traded and corporate activity in the market is some of the highest he’s ever seen, particularly at the smaller end of the market.

It means that switches in momentum and themes are being amplified due to the amount of money moving through the ASX.

“There’s so much money moving around the system and at a very fast pace which is having an additional impact on the movement and velocity of share prices,” he said.

“The rotation out of high growth stocks and into value stocks since the vaccine announcement is clear as investors reassess the valuations of online businesses and brick and mortar stores.”