As brick and mortar retailers had to close their doors in 2020, e-commerce benefited from a major boost. This sent the shares of many e-commerce stocks skyrocketing as investors baked in optimism for the future. However, since the high inflation numbers first appeared in early 2021 and supply chain costs skyrocketed, many e-commerce companies saw their margins squeezed and demand drop. Therefore, many e-commerce companies are now trading at much lower valuations.
Those investors who are interested in e-commerce stocks now have an opportunity to purchase shares at lower prices, so I decided to take a look at which e-commerce stocks guru investors were buying in the fourth quarter of 2022. Here are my two favorite guru-backed e-commerce stocks that I believe will rebound in the future.
1. Chewy
Chewy (CHWY, Financial) is the largest online pet products retailer in the United States. The company offers over 100,000 products, including pet food, treats, supplies and much more. Chewy even has its own “pet pharmacy” which offers high margin medicine for pets. If you have ever had to take your pet to the veterinarian, you will be aware that the medication is not cheap.
According to data by the American Pet Products Association, there are over 89 million dogs across the United States alone. This is approximately 1.6 for every household across the U.S. The popularity of dogs (and pets in general) boomed during the lockdowns of 2020, as pets offered companionship for many. Therefore Chewy will benefit from both the growth in pets and e-commerce as a whole.
Chewy has also built a unique brand character and voice. The business offers quirky captions, and even festive pet outfits for Christmas time and Halloween. I believe this helps to develop what Warren Buffett (Trades, Portfolio) would call a “share of mind" with the brand, which could act as a competitive advantage long term.
Strong financials
Chewy reported strong financial results for its third quarter of fiscal 2022. Its revenue was $2.53 billion, which beat analyst expectations by $72.24 million and increased by a steady 14.46% year over year. This was driven by Chewy’s “Autoship” service, which has helped to drive predictable revenue growth despite the tough economic environment.
Rather than trying to entice customers to come back to its website to buy products, the “Autoship” service effectively acts as a subscription model. This segment of the business grew at a rapid 19% growth rate and contributed to over 73% of net sales.
The company also reported a 14% increase in net sales per active customer to $477. It was also great to see that the vast majority (83%) of its total revenue is derived from “non discretionary” categories such as food and health care. This was fantastic to see as given many analysts have forecast a recession 2023, consumers are likely to cut back on discretionary spending. In fact, the company has already reported signs of this with a 5% decline in discretionary spending in the third quarter.
Moving on to profitability, Chewy reported a solid gross margin of 28.4%, which increased by 200 basis points year over year.
Its operating losses have also been improving with an operating loss of just $400,000 reported for the third quarter. This was an improvement over the eye watering $31.9 million operating loss reported in the year-ago quarter.
On an earnings per share basis, the company was surprisingly profitable with EPS of $0.01 reported in the third quarter, which surpassed analyst expectations by $0.09.
The company also has a strong balance sheet with $275 million in cash and short term investments. In addition, the company reported $510 million in total debt.
Valuation
Chewy has a price-sales ratio of 1.7, which is 46% cheaper than its five-year average.
The GF Value chart indicates a fair value of $86.65 per share and thus the stock is undervalued at the time of writing. The GuruFocus system does indicate a possible value trap due to factors such as negative returns on equity, but I believe the company can turn itself around and get positive returns.
Gurus
Value investor Joel Greenblatt (Trades, Portfolio) of Gotham Asset Management loaded up on 11,886 shares of the stock in the fourth quarter of 2022, during which shares of Chewy traded at an average price of $38.95 per share, which is close to where the stock trades at the time of writing.
The world's largest hedge fund, Bridgewater Associates, which was founded by Ray Dalio (Trades, Portfolio), also purchased 52,682 shares in the fourth quarter.
2. Wayfair
Wayfair (W, Financial) is an e-commerce company which focuses on the home furniture category. This market has historically been one of the last to convert to an pure e-commerce model. This is mainly due to the cost of shipping and the fact that most people like to see furniture in real life before purchasing.
However, Wayfair has started to solve a few of these challenges in the home furniture market. One method has been through the launch of an Augmented Reality solution which enables customers to visualize how furniture such as a couch would look in their homes.
On the delivery side, Wayfair has built out a network of over 23,000 suppliers with its own logistics network called Castlegate. This means the company effectively has full control over its supply chain, which helps in managing the customer experience, returns and customer expectations. For example, Wayfair boasts its small parcels can reach over 95% of people in the U.S. within just two days, which is fantastic.
Wayfair has also taken its logistics network one step further through a “freight forwarding” process. This basically means the company can directly manage its imports more effectively, which is especially important due to the port delays which were common across many U.S. ports due to supply chain distruptions.
Mixed financials
Wayfair reported mixed financial results for its fourth quarter of fiscal year 2023. Its revenue was $3.1 billion, which beat analyst expectations by $34.56 million, despite declining by 4.64% year over year. Its overall top line was driven by 11 million orders in the fourth quarter, with a mattress sold every 9.2 seconds during the holiday season. Of course, its sales were slightly offset overall by the tepid macroeconomic environment.
Moving on to profitability, the company reported $331 million in operating losses in the quarter, which was worse than the $196 million reported in operating losses reported in the year-ago quarter.
This was pretty terrible, but on a positive note, management has announced a plan to reduce costs by up to $1.4 billion. This includes the reduction of employee count by 1,750 and improving cost efficiency.
Its adjusted Ebitda loss was $71 million, or -2.3% of net revenue. A positive is its adjusted Ebitda was a positive $11 million in its U.S. segment.
Wayfair also reported $1.3 billion in cash and marketable investments with ~$1.8 billion in total liquidity. The company does have fairly high debt of $4.1 billion, but the majority of this is long term debt and thus manageable given the strong cash position.
Valuation
Wayfair trades at a price-sales ratio of 0.34, which is 75% cheaper than its five-year average.
The GF Value chart indicates a fair value of ~$200 per share, which means the stock is undervalued at the time of writing. However, we do get another value trap warning, which I think is a legitimate concern given the company’s losses have increased.
Gurus
Paul Tudor Jones (Trades, Portfolio) of Tudor Investment Corporation purchased 25,963 shares of Wayfair in the fourth quarter of 2022, during which shares traded at an average price of $34.90 apiece.
Steven Cohen (Trades, Portfolio) also increased his firm's position in the stock by over 357% to 687,127 shares.
Final thoughts
Both Chewy and Wayfair are two very interesting e-commerce companies. I personally believe the idea behind Wayfair is great, but given the macroeconomic environment and high inflation, I believe the company will struggle with its margins, which is a major risk. On the other hand, I believe Chewy offers much greater potential as its products are easier to ship and returns are likely to be lower, as I Imagine a customer would rarely return dog food (even if the dog didn’t like it). In addition, Chewy’s subscription model effectively locks its customers into purchases which are recession proof somewhat (pet food and medicine).
