Many investors may not perceive retailing as a growth industry. Prominent players in the industry, such as Walmart, have often logged single-digit comparable sales growth and usually sell at average earnings multiples.
However, innovations in retailing niches such as e-commerce have often spawned notable growth stocks. And amid the recent market struggles, internet and direct marketing retail stocks such as Amazon (NASDAQ: AMZN) and Etsy (NASDAQ: ETSY) present unique opportunities.
Amazon’s recent 20-for-1 stock split could give this struggling stock a boost. Stock splits do not change the fundamentals, but the lower price could make shares more attractive to smaller investors, a factor that might increase demand and liquidity.
Amazon stock might need this help right now. Like other retailers, it has struggled with supply-chain issues, rising labor costs, and price inflation. This showed up in Amazon’s earnings report for the first quarter of 2022. Net sales came in at $116 billion for Q1, a 7% increase vs. the year-ago quarter. This is a dramatic slowdown considering the 22% rise in net sales in 2021.
Moreover, a 13% surge in operating expenses cut operating income by 59%. Add over $8 billion in losses on marketable equity securities, and Amazon lost $3.8 billion in the quarter, down from an $8.1 billion profit in the first quarter of 2021.
However, investors need to remember that Amazon is also the leading cloud infrastructure company. Grand View Research estimates a global $368.97 billion market size as of 2021, and it believes this market will grow to $1.55 trillion by 2030, reflecting a compound annual growth rate of 16%.
Its cloud division, Amazon Web Services (AWS), seems to have benefited. AWS experienced a 36% revenue surge to $18.4 billion, or around 16% of Amazon’s net sales. This took its operating income 56% higher to $6.5 billion. In comparison, the North America and International segments logged a combined operating loss of over $2.8 billion, further cementing AWS’s place as the profit center of the company.
Also, though Amazon stock dropped 23% over the last year, it still has risen 144% over the previous five years, well ahead of the S&P 500‘s 87% gain. Moreover, valuations have fallen dramatically. Its current P/E ratio of about 58 comes in well below the triple-digit earnings multiples it has experienced over the past decade, a level that could seem low again if it can turn its retail operations back to profitability.
On the surface, an artisan-oriented e-commerce site such as Etsy may struggle to compete with Amazon and others. At a market cap of just $10.6 billion, it is less than 1% of Amazon’s market cap of around $1.25 trillion.
However, Amazon’s success has typically come from commoditized products. This leaves a niche for Etsy, which limits itself to artisans, craft suppliers, and vintage goods dealers.
Additionally, its growth story likely hinges on international expansions. Etsy has built a significant following in the U.K. and Germany and has expanded marketing into many EU countries.
Moreover, its purchase of Elo7 last year, the so-called “Etsy of Brazil,” hints at its potential in the developing world. The company estimates an addressable market of $2 trillion, of which Etsy currently serves only about $12 billion, a situation that could make Etsy a top e-commerce buy right now.
Still, amid supply-chain and inflation-related challenges, growth has slowed dramatically. In the first quarter of 2022, revenue increased only 5% to $579 million increased 5% from year-ago levels. This is a dramatic slowdown considering that 2021 revenue climbed by 35% compared with 2020.
Also, during Q1, operating expenses increased 25% year over year, causing its net income to fall to $86 million, a 40% drop vs. the first quarter of 2021.
Furthermore, its pain could continue. The company forecasts between $540 million and $590 million in revenue for Q2, representing a 7% increase at the midpoint. This slowdown probably contributed to the stock’s decline of over 70% from its peak in November.
However, the shares now sell for just about 28 times earnings, near a record low for Etsy. Given the company’s largely untapped markets and aggressive moves outside the U.S., it will probably move past its current challenges over time.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Etsy. The Motley Fool has a disclosure policy.