Analysis of the e-Commerce sector including SQ, LYFT, OSTK, VRSN, DOCU, IBUY.
The purchase of the remains of the bankrupt Bed Bath and Beyond franchise by Overstock.com epitomizes the continued demise of brick-and-mortar stores succumbing to the efficiencies of e-Commerce. It’s a continuing rather than a new story but the trend seems inexorable.
This thought motivated me to contact Brand Loyalties. A few years ago, I surveyed alternative data sets for an article published in the Journal of Investing in 2019 called “Using Alternative Research Data in Real World Portfolios.” The standout was Brand Loyalties, a 10+- year specialist in providing alternative-data-based signals to hedge funds and institutional investors.
Brand Loyalties produces data sets based upon luminosity (brightness) and relevance of daily website mentions of brands. The analytic techniques and exhaustively thorough mapping lexicon they have developed over the years were eye-opening to me during the research and analysis I performed for the 2019 article. The firm has also maintained live-on-website performance of many equally weighted thematic indices that have persistently outperformed the equivalent ETFs where such ETFs exist. Since inception and in most calendar years, the top performing index has been its e-Commerce index, a nice congruence with this week’s subject.
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The stocks selected are:
Block, Inc. (SQ), together with its subsidiaries, creates tools that enables sellers to accept card payments and provides reporting and analytics, and next-day settlement. The company provides hardware products, including Square Register that combines its hardware, point-of-sale software, and payments technology; Square Terminal, a payments device and receipt printer to replace traditional keypad terminals, which accepts tap, dip, and swipe payments; Square Stand, which enables an iPad to be used as a payment terminal or full point of sale solution; and Square Reader for contactless and chips that accepts EMV chip cards and NFC payments, enabling acceptance through Apple Pay, Google Pay, and other mobile wallets. The company was formerly known as Square, Inc. and changed its name to Block, Inc. in December 2021. Block, Inc. was incorporated in 2009 and is based in San Francisco, California.
Lyft, Inc. (LYFT) operates a peer-to-peer marketplace for on-demand ridesharing in the United States and Canada. The company operates multimodal transportation networks that offer riders personalized and on-demand access to various mobility options. It provides Ridesharing Marketplace, which connects drivers with riders; Express Drive, a flexible car rentals program for drivers; Lyft Rentals that provides vehicles for long-distance trips; and a network of shared bikes and scooters in various cities to address the needs of riders for short trips. The company also integrates third-party public transit data into the Lyft app to offer riders various transportation options. In addition, it offers access to autonomous vehicles; centralized tools and enterprise transportation solutions, such as concierge transportation solutions for organizations; Lyft Pink subscription plans; Lyft Pass commuter programs; first-mile and last-mile services; and university safe rides programs. The company was formerly known as Zimride, Inc. and changed its name to Lyft, Inc. in April 2013. Lyft, Inc. was incorporated in 2007 and is headquartered in San Francisco, California.
Overstock.com, Inc. (OSTK) Overstock.com, Inc. operates as an online retailer in the United States. It offers furniture, décor, area rug, bedding and bath, home improvement, outdoor, and kitchen and dining items. The company provides its products and services through its internet websites comprising overstock.com, o.co, overstock.ca, and overstockgovernment.com. It also offers businesses advertising products and services on its website; Marketplace, a service that allows its partners to sell their products through third party sites; products to international customers using third party logistics providers; and Supplier Oasis, a single integration point through which its partners can manage their products, inventory, and sales channels, as well as obtain multi-channel fulfillment services through its distribution network. The company was formerly known as D2-Discounts Direct and changed its name to Overstock.com, Inc. in October 1999. Overstock.com, Inc. was founded in 1997 and is headquartered in Midvale, Utah.
Verisign, Inc. (VRSN), together with its subsidiaries, provides domain name registry services and internet infrastructure that enables internet navigation for various recognized domain names worldwide. The company enables the security, stability, and resiliency of internet infrastructure and services, including providing root zone maintainer services, operating two of the 13 internet root servers; and offering registration services and authoritative resolution for the .com and .net domains, which supports global e-commerce. It also back-end systems for .cc, .gov, .edu, and .name domain names, as well as operates distributed servers, networking, security, and data integrity services. The company was incorporated in 1995 and is headquartered in Reston, Virginia.
DocuSign Inc. (DOCU) provides electronic signature solutions in the United States and internationally. The company provides DocuSign e-signature solution that enables sending and signing of agreements on various devices; Contract Lifecycle Management (CLM), which automates workflows across the entire agreement process; and Gen for Salesforce, which allows sales representatives to automatically generate agreements with a few clicks from within Salesforce. It also provides Identify, a signer-identification option for checking government-issued IDs; Standards-Based Signatures, which support signatures that involve digital certificates; and Monitor that uses advanced analytics to track DocuSign eSignature web, mobile, and API accounts. In addition, the company offers Rooms for Real Estate that provides a way for brokers and agents to manage the entire real estate transaction digitally; DocuSign Federal and DocuSign CLM are FedRAMP, an authorized version of DocuSign eSignature for U.S. federal government agencies; and life sciences modules that support compliance with the electronic signature practices. The company sells its products through direct and partner-assisted sales, and web-based self-service purchasing. The company was incorporated in 2003 and is headquartered in San Francisco, California.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Now let’s look at these stocks adding the ValuEngine lens. The following table presents a look at the data behind these stocks, including the ValuEngine Buy/Hold/Sell rating. The ValuEngine Rating is an overall assessment of a stock’s relative attractiveness. It combines the following five factors:
- risk-return tradeoff
- market capitalization
- forecasted future returns
Less than 3 percent of the stock universe receives the highest 5-engine rating (Strong Buy), while the lowest rating is a single engine (Strong Sell).
For an industry benchmark comparison, we include the Amplify Online Retail ETF (IBUY). IBUY offers straightforward and diversified equity exposure to global online retailers. The fund holds stock in firms with at least 70% of their revenues from online sales. Firms can be of any market cap subject to typical minimum size and liquidity constraints. US stocks receive a 75% minimum weight, foreign stocks receive the remainder. The equal weighting adds diversity and keeps giants like Amazon from dominating the basket, but also increases exposure to smaller and possibly more risky firms. Overall, IBUY’s targeted online coverage and methodology should be evaluated for soundness and suitability before considering investment in this fund.
iShares S&P 500 ETF (IVV), a more efficient and less expensive ETF than SPY and also represents the S&P 500, is shown as a benchmark for the stocks’ individual data points.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
|Stock Name||Block Inc||Lyft Inc||Overstock.com||Verisign Inc||DocuSign Inc||Amplify Online Retail ETF||iShares S&P 500 ETF|
|Market Cap, (Bllns.)||32.2||4.4||0.9||20.7||8.9||59.4 (Avg.)||689.4 (Avg.)|
|VE Forecast 3-mo. Price Return||2.85%||1.49%||-1.89%||2.16%||-0.84%||N/A||2.23%|
|VE Forecast 1-yr. Price Return||12.15%||10.30%||-0.34%||1.59%||1.12%||N/A||-2.00%|
|Last mo. Price Return||-9.48%||-6.62%||-33.66%||-2.62%||-9.46%||-0.99%||0.38%|
|Last 3 mo. Price Return||-20.18%||6.92%||-10.09%||-10.68%||-19.03%||0.77%||0.87%|
|Last 6 mo. Price Return||-28.68%||25.47%||12.32%||4.60%||-22.28%||6.04%||14.29%|
|Historic 1-Yr. Price Return||-23.63%||-33.61%||-26.84%||14.95%||-27.09%||4.42%||14.02%|
|Historic 5-Yr Ann. Price Return||-8.6%||-42.8%||-2.2%||5.4%||-4.3%||-2.6%||10.1%|
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
- One potentially positive sign for these five new additions to the e-commerce portfolio shared with us from Brand Loyalties is that all are rated at least a 3 (Hold) by ValuEngine’s predictive model. Better still, two of them, SQ (Block, Inc.) and LYFT, are rated 4 (Buy).
- Among the two e-retailers garnering our Buy rating, SQ has the higher projected price appreciation according to VE’s forecast model and a slightly less volatile history. Also, SQ’s valuation ratios are not as inflated as those of LYFT although neither can be considered cheap. Please note that both are grossly overvalued according to ValuEngine’s valuation model which works independently from the forecast model.
- Among the three e-retailers rated hold, Verisign (VRSN) has the highest projected price appreciation for the next 3 months and 12 months. It also has been by far the most stable of the five stocks with the lowest volatility and Beta by a wide margin. It also has the most stable history for earnings growth and revenue growth. These characteristics might make it the best stock among the five to research independently as a potential long-term buy-and-hold stock as differentiated from a stock bought for highest potential one-year price gain.
- In virtually the same business, DocuSign (DOCU) is an average 3-rated (Hold) stock but is inferior to Verisign in just about every category. I note its presence in the Brand Loyalties buy-signal list as verification that VRSN is in a sub industry with greater rising brand awareness than other e-commerce stocks.
- I recommend extreme caution when considering Overstock.com (OSTK). It is not the same company that had been around for 15 years competing with Etsy and Wayfair. That founder had liquidated former inventories and left the firm leaving a holding company. That holding company just recently bought the majority of the Bed, Bath and Beyond assets from the brick-and-mortar company’s liquidation as noted in the beginning of this article. Therefore, historical data is fairly irrelevant. The high web mention rate is probably more event-driven than driven by revenue-related luminosity. At best, I’d rate this a wait-and-see.
- Please note that the e-commerce industry itself does not lend itself to the interests of income investors. Most of the industry’s stocks do not pay a dividend and that applies to the five stocks we just reviewed. With a paltry 0.3% dividend yield, the Amplify Online Retail ETF (IBUY), including these companies and many others with a large portion of their revenues from internet retail, reflects this fact.
- Fee-conscious ETF investors should note that IBUY carries an 0.65% Expense Ratio which is on the very high end of an industry-indexed ETF. Its 5-plus year return series has also been consistently inferior to that of Brand Loyalties’ i-Biz index as shown in this table.
|2018||2019||2020||2021||2022||2023 thru Sep 22 2023||Past 5 Years (Annualized)|
|Brand Loyalties i-Biz Index (i-Biz)||9.01%||-7.84%||174.09%||95.94%||-50.08%||37.05%||24.48%|
|Amplify Online Retail ETF (IBUY)||-1.93%||28.48%||123.80%||-22.99%||-55.71%||12.54%||-2.98%|
|iShares S&P 500 ETF (IVV)||-4.47%||31.25%||18.40%||28.76%||-18.16%||7.50%||15.76%|
- It should be noted that index-based ETFs can sometimes underperform their indexes due to implementation shortfall. That said, IBUY’s substantial underperformance of i-Biz and IVV may make it difficult to justify its high fee to potential investors.
- The good news for active managers and alpha-seekers is it appears through the i-Biz example that the potential for excess returns through an alpha strategy using derived signals is higher in this industry than in most others characterized by larger, more mature and more widely followed companies. Please note that the average market cap of the companies selected was about 15 Billion and the same stat for IBUY is a mere $30 Billion as compared with nearly 700 Billion for IVV.
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The e-commerce industry is characterized by small companies with just-burgeoning revenue streams and many just entering the positive earnings stage. As such, it has higher-than-average returns for gains. Two such stocks are Block Inc. (SQ) and Lyft Inc. (LYFT) with the edge going to SQ. Those researching the sector for investment, however, should be aware that the prices of most of its companies are highly volatile and the majority do not pay dividends. Therefore, the industry, especially if restricted to companies that get the majority of their revenues from online, is less suitable for conservative investors. A possible exception might be Verisign (VRSN) which has more stable price and fundamental characteristics than the other companies analyzed here. As always it is important to do one’s own research.
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
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