‘The Next Amazon’: 10 Undervalued Ecommerce Stocks with Huge Upside

Published on August 19, 2021 at 4:19 pm by Usman Kabir in Hedge Funds, News

In this article, we discuss the 10 undervalued ecommerce stocks with huge upside. If you want to skip our detailed analysis of these stocks, go directly to ‘The Next Amazon’: 5 Undervalued Ecommerce Stocks with Huge Upside.

The ecommerce business has become one of the main drivers of the world economy in recent years. According to New York-based market research firm eMarketer, ecommerce sales across the world rose over 25% in 2020, influenced by the COVID-19 pandemic but continuing on a growth trajectory that preceded the pandemic, to more than $4 trillion. This figure is expected to climb close to 17% to reach $5 trillion this year. Amazon.com, Inc. (NASDAQ: AMZN), the largest ecommerce platform in the world, is one of the main beneficiaries of this boom.

Amazon Hitting a Plateau?

However, in earnings results for the second quarter of 2021, posted in late July, Amazon.com, Inc. (NASDAQ: AMZN) missed market expectations on revenue, reporting $113 billion against consensus estimates of almost $115 billion. The revenue miss led to a number of analyst downgrades for the company. On June 30, a day after the disappointing earnings report and guidance for the third quarter, investment advisors JPMorgan, UBS, Cowen, and Oppenheimer all lowered the price targets on the stock.

Amazon.com, Inc. (NASDAQ: AMZN), which, as of August 17, 2021, is trading at over $3,200 per share, has become one of the most expensive stocks on the market in recent years, mostly putting it out of reach for the average investor who wants to take advantage of the ecommerce explosion around the world. However, for those who want to avoid the stock, Sea Limited (NYSE: SE), Shopify Inc. (NYSE: SHOP), MercadoLibre, Inc. (NASDAQ: MELI), Etsy, Inc. (NASDAQ: ETSY), and JD.com, Inc. (NASDAQ: JD) could be viable alternatives.

Valuation Concerns

There have also been increased murmurings around the valuation of Amazon.com, Inc. (NASDAQ: AMZN) in recent weeks, especially in context of the second quarter earnings miss. According to Aswath Damodaran, a professor at the Stern School of Business at New York University, the pricing of the stock has always been “bothersome” and has assumed increased urgency in light of slowing growth and increased competition from retail giants like Walmart. Damodaran also believes Amazon is “a company which can overshoot in both directions and distribution of value is huge”.

Amazon.com, Inc. (NASDAQ: AMZN), over the past decade, has disrupted the retail sector in much the same way that fintech firms have transformed the world of finance. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

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Our Methodology

The main idea behind this article is to discuss some ecommerce stocks with long-term growth potential for those who want to invest in the lucrative ecommerce market but also want to avoid expensive and already matured names like Amazon.

We took into account business fundamentals, analyst ratings and hedge fund sentiment while choosing these stocks.

We also consulted interesting analysis for these stocks on different notable finance websites, especially Seeking Alpha.

The stocks are ranked based on the number of hedge funds having stakes in each, based on Insider Monkey’s data of 866 funds, as of the end of the first quarter.

With this context in mind, here is our list of the 10 undervalued ecommerce stocks with huge upside.

‘The Next Amazon’: Undervalued Ecommerce Stocks with Huge Upside

10. Meituan (OTC: MPNGY)

Number of Hedge Fund Holders: N/A

Meituan (OTC: MPNGY) is placed tenth on our list of 10 undervalued ecommerce stocks with huge upside. The company is based in China and operates an online platform which connects merchants with buyers. The firm is one of the largest Chinese firms listed in the US in terms of market capitalization. It aspires to be the Amazon of Services. According to finance expert Kevin Carter, the company has tremendous growth potential since it leads the food delivery, consumer products, retail services, and social commerce businesses in the massive Chinese market..

In earnings results for the first quarter, posted on May 28, Meituan (OTC: MPNGY) reported a revenue of more than RMB37 billion, up over 121% compared to the revenue over the same period last year.

Meituan (OTC: MPNGY) was founded in 2003 and has a market cap of over $180 billion. It posted more than $17.4 billion in revenue last year. It was previously known as Meituan Dianping but changed the name to Meituan in October 2020.

Just like Sea Limited (NYSE: SE), Shopify Inc. (NYSE: SHOP), MercadoLibre, Inc. (NASDAQ: MELI), Etsy, Inc. (NASDAQ: ETSY), and JD.com, Inc. (NASDAQ: JD), Meituan (OTC: MPNGY) is one of the best undervalued ecommerce stocks with huge upside for those who want to avoid Amazon.com, Inc. (NASDAQ: AMZN).

9. Baozun Inc. (NASDAQ: BZUN)

Number of Hedge Fund Holders: 11

Baozun Inc. (NASDAQ: BZUN) is ranked ninth on our list of 10 undervalued ecommerce stocks with huge upside. The firm operates from Shanghai and provides ecommerce solutions to brand partners. Baozun Inc. (NASDAQ: BZUN) is different from other retail chains since it also markets IT solutions, online store operations, digital marketing, customer services, warehousing, and fulfillment to partners. Nikolaos Sismanis, a market expert and the author of a book titled Wheel of Fortune, believes investors should take note of the stock that is trading at ridiculous multiples amid a broader drawdown in Chinese stocks that have forward PE ratios of between 2-10. Sismanis highlighted the robust first quarter results of the firm and underlined that the market would eventually be forced to recognize the profitability potential of stocks like Baozun Inc. (NASDAQ: BZUN).

On June 9, investment advisory JPMorgan initiated coverage of Baozun Inc. (NASDAQ: BZUN) stock with an Overweight rating and a price target of $45, noting that the firm was one of the leading ecommerce brands in China and had a competitive advantage to secure growth.

At the end of the first quarter of 2021, 11 hedge funds in the database of Insider Monkey held stakes worth $41 million in Baozun Inc. (NASDAQ: BZUN), down from 14 the preceding quarter worth $82 million.

In addition to Sea Limited (NYSE: SE), Shopify Inc. (NYSE: SHOP), MercadoLibre, Inc. (NASDAQ: MELI), Etsy, Inc. (NASDAQ: ETSY), and JD.com, Inc. (NASDAQ: JD), Baozun Inc. (NASDAQ: BZUN) is one of the best undervalued ecommerce stocks with huge upside for those who want to avoid Amazon.com, Inc. (NASDAQ: AMZN).

8. Ozon Holdings PLC (NASDAQ: OZON)

Number of Hedge Fund Holders: 17

Ozon Holdings PLC (NASDAQ: OZON) is a Cyprus-based company that owns and runs an online retailer that markets multi-category consumer products primarily in Russia. It is placed eighth on our list of 10 undervalued ecommerce stocks with huge upside. The firm has long-term growth potential given that the ecommerce market in Russia is still in early stages and is projected to grow rapidly in the next five years. Ozon Holdings PLC (NASDAQ: OZON) is a leader of this market and looks set to sustain this growth. The company’s fintech and logistics sectors are also expected to help the company capture greater market share in the coming years.

On June 28, investment advisory HSBC reiterated a Buy rating on Ozon Holdings PLC (NASDAQ: OZON) stock and raised the price target to $73 from $65, underlining that the ecommerce business was growing in Russia and would benefit the firm.

Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Driehaus Capital is a leading shareholder in Ozon Holdings PLC (NASDAQ: OZON) with 901,074 shares worth more than $50 million.

Alongside Sea Limited (NYSE: SE), Shopify Inc. (NYSE: SHOP), MercadoLibre, Inc. (NASDAQ: MELI), Etsy, Inc. (NASDAQ: ETSY), and JD.com, Inc. (NASDAQ: JD), Ozon Holdings PLC (NASDAQ: OZON) is one of the best undervalued ecommerce stocks with huge upside for those who want to avoid Amazon.com, Inc. (NASDAQ: AMZN).

7. Qurate Retail, Inc. (NASDAQ: QRTEA)

Number of Hedge Fund Holders: 31

Qurate Retail, Inc. (NASDAQ: QRTEA) is a Colorado-based company that engages in online commerce activities. It is ranked seventh on our list of 10 undervalued ecommerce stocks with huge upside. Khaveen Investments, a hedge fund focusing on investments in technology stocks, believes the stock is underpriced by 373% and has adapted well from teleshopping to digitization. The fund cited the lean business model, low capex requirements, positive cash flows, and partnerships with emerging brands as some of the growth catalysts for the company.

In April, investment advisory Bank of America initiated coverage of Qurate Retail, Inc. (NASDAQ: QRTEA) stock with a Buy rating and a price target of $26. Earlier in February, DA Davidson had also mentioned several growth catalysts for the company in a ratings update.

Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm Lyrical Asset Management is a leading shareholder in Qurate Retail, Inc. (NASDAQ: QRTEA) with 13.8 million shares worth more than $162 million.

Sea Limited (NYSE: SE), Shopify Inc. (NYSE: SHOP), MercadoLibre, Inc. (NASDAQ: MELI), Etsy, Inc. (NASDAQ: ETSY), and JD.com, Inc. (NASDAQ: JD) are some of the best undervalued ecommerce stocks with huge upside for those who want to avoid Amazon.com, Inc. (NASDAQ: AMZN), along with Qurate Retail, Inc. (NASDAQ: QRTEA)

In its Q4 2020 investor letter, Weitz Investment Management, an asset management firm, highlighted a few stocks and Qurate Retail, Inc. (NASDAQ: QRTEA) was one of them. Here is what the fund said:

“The strongest performance for the calendar year came from Qurate Retail. Starting from a very low valuation, shares rallied as the business’s turnaround gained traction, in turn giving management the confidence to return a substantial amount of capital to shareholders, including distributing $3 per share in special dividends (more than one-third of the start-of-year stock price).”

6. Chewy, Inc. (NYSE: CHWY)

Number of Hedge Fund Holders: 32

Chewy, Inc. (NYSE: CHWY) is placed sixth on our list of 10 undervalued ecommerce stocks with huge upside. The firm is headquartered in Florida and operates an online marketplace for pet products. It markets more than 70,000 products from around 2,500 partner brands. Michael Wiggins De Oliveira, a market expert and author of Deep Value Returns, has outlined that the company is continuing to make positive strides and improving overall profitability. He underlined how the stock was priced at 4x sales, making the argument that it was a competitive entry point for investors who wanted to consider owning it.

On August 4, investment advisory Credit Suisse initiated coverage of Chewy, Inc. (NYSE: CHWY) stock with an Outperform rating and a price target of $121. Katie Tryhane, an analyst at the firm, issued the ratings update.

Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in Chewy, Inc. (NYSE: CHWY) with 1.3 million shares worth more than $113 million.

In its Q4 2020 investor letter, Nelson Capital Management, an asset management firm, highlighted a few stocks and Chewy, Inc. (NYSE: CHWY) was one of them. Here is what the fund said:

“One of our investment themes over the last several years has been the “humanization of pets,” which refers to the increasing amount of time and money that people are devoting to their animals. This theme has become even more evident during the pandemic, as many families and individuals have adopted pets while spending more time at home. Today, more than 85 million US households have pets. In 2015, roughly 7% of pet products in the U.S. were bought online. By 2019, that number had increased to 22%. Moreover, the pandemic has caused pet parents, new and experienced alike, to sign up for delivery of pet supplies in order to avoid trips to physical stores. 72% of pet owners made at least one online purchase for their pets in the past 12 months and 39% of those were subscription-based purchases.

Chewy (tkr: CHWY) is the largest pure-play pet “e-tailer” in the world, offering “the personalized service of a neighborhood pet store combined with the convenience and speed of e-commerce.” The company was founded in 2011 and was bought by PetSmart in 2017, for $3 billion. In June, 2019, Chewy went public. All of its sales are currently U.S.-based. The company has co-headquarters with one facility in Dania Beach, Florida and one in Boston, Massachusetts, and employs about 12,000 people. Chewy offers a selection of high-quality pet food, treats, supplies, and pet healthcare products.

In addition to one-time sales, Chewy is creating a recurring revenue model through its “autoship” program. This is essentially a subscription service for products that are sent at intervals specified by customers and includes such items as food and medicine. Customers are more profitable the longer they stay with the company, as their “lifetime value” grows. The company is organized around providing an exceptional customer experience. Chewy has 10 fulfillment centers scattered across the US, which enable cost-efficient overnight shipments to about 80% of the U.S. population and cost-efficient two-day shipments to nearly 100%. This allows Chewy to provide excellent service to the company’s more than 12.7 million active users.

Chewy’s ability operate profitably in the future hinges on two key variables: growing its customer base and more efficiently managing its fulfillment costs through automation of its fulfillment centers, thereby decreasing labor costs. Chewy has a smart, experienced management team and the company is expected to become profitable at the end of this fiscal year.”

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