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Don’t Play the Hype of the Most Recent E-commerce IPO – Buy This Instead

0 | By Alex Kagin

It’s funny – with vaccines rolling out and stores starting to open as lockdowns ease, you’d think one of the hottest market trends over the past year – e-commerce – would start to slow, too.

But that’s not the case.

The COVID-19 pandemic shifted e-commerce in 2020 and into this year, maybe more than any other time in history.

Sales skyrocketed as brick-and-mortar stores took their business online using platforms like Shopify Inc. (SHOP), Etsy Inc. (ETSY), Chewy Inc. (CHWY), Amazon.com Inc. (AMZN), and a change in people’s buying habits had changed forever.

In the third quarter of 2020, e-commerce volume increased 36.7% over the prior year, according to the U.S. Census Bureau.

And it won’t stop or slow down.

In fact, a recent survey done by an organization that is part of the United Nations found that most respondents will continue to shop online after the pandemic.

That is why I want to talk to you about one of the most recent e-commerce companies to go public, ContextLogic Inc. (WISH), the operator of Wish.com, a discount e-commerce platform.

What I Like:

ContextLogic has a lot going for it. Founded in 2010, former Alphabet engineer Piotr Szulczewski wanted to create a more affordable e-commerce platform than Amazon, specifically targeting low- and middle-income customers.

This is done through a mobile first platform that works by having merchants list their products and sell directly to the consumer. By doing this Wish.com eliminates distributor fees for the sellers while providing shoppers with low-priced merchandise. Prices are also kept down as a significant portion of the product available through the app comes from overseas distributors and often times unbranded to keep prices down.

Wish.com is one of the most unique eCommerce platforms and it shows with how many customers they have been able to acquire and how fast it has grown. They have over 100 million monthly active users in over 100 countries and have shipped over 640 million items.

I like the way that ContextLogic has gone about their business as an evolution of brick-and-mortar discount shopping and its discovery-based search is completely unique. With over 150 million items listed on their website, they are a formidable competitor to companies like Amazon.

What I Don’t Like:

While the business model is unique and offering a product many others are not, it is unfortunately not translating to the bottom line, and I do not see the path to near term profitability.

Revenue growth was incredible in its earlier years and saw growth of over 200% in 2016. In 2019, there was a significant slowdown to 10% revenue growth, which was actually flat YoY if you do not count logistics revenue. Then in the first quarter of 2021, revenue was actually down 2% year over year and has yet to recover to previous highs.

This is a stark difference from other e-commerce companies like Sea, Amazon, Mercadolibre, Etsy, and Shopify.

Monthly active users also dropped in the last quarter, which is a big concern, given how large the TAM is for this market and brick-and-mortar stores opening back up.

This all adds up to a company that I see continuing to lose money.

In its most recent quarter, Q3/2020, they did $606M in revenue and lost $99M. While its growing logistics business could help stem some of the losses, we would need to see much more growth in platform usage.

What You Should Buy Instead:

If you want to invest on the coattails of this rapid market growth, don’t play the hype of the recent IPO; e-commerce is filled with better investments.

We’ve talked about Sea Ltd. (SE) as One of the Best Tech Stocks Tapping into 300% Industry Growth and Mercadolibre Inc. (MELI), The Amazon of Latin America. They’re still two of the most exciting e-commerce companies in the world. While both are up triple digits since we first spoke about them, there are so many companies involved in e-commerce that we don’t want to miss out on.

That is why I want to invest in The Amplify Online Retail ETF (IBUY). It holds great companies like the ones below.

  • Shopify – Facilitates businesses to sell online through its e-Commerce platform and logistics services
  • Chewy – Online pet products retailer
  • ETSY – Online marketplace for handmade items
  • Stitch Fix – Personal styling service that delivers clothes directly to your door

There is so much more this ETF holds, and you can explore for yourself here. E-commerce will continue to grow, and while it might slow down temporarily as the vaccine roles out, there is clearly a long-term trend that is set to be a larger part of the entire retail market.

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