Daily Archives: November 8, 2018

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4 Stocks Profiting From Amazon’s Decline

ecommerce stocks

Source: Shutterstock

The stock market rout has left no victims, least of all secular growth giant Amazon(NASDAQ:AMZN). Mostly thanks to a rapid slowdown in the e-commerce business, Amazon stock has dropped into bear market territory recently and is having trouble staging a reversal.

The rapid slowdown in Amazon’s e-commerce business isn’t a good thing for Amazon stock. But it also isn’t that much of a surprise. After all, the business had been growing at ridiculous rates over the past several years, and expanded to control 50% of the U.S. e-commerce market. That wasn’t sustainable. Eventually, other retailers would pivot en masse to the digital channel, market share would be more evenly distributed and Amazon’s e-commerce growth would slow.

That is happening now. Amazon’s e-retail growth rates are coming off the rails. But, other retailer’s e-commerce growth rates are actually improving. That means that while Amazon stock falls, there actually a group of stocks out there that are consequently winning.

Which stocks belong in this group? Let’s take a closer look at four stocks that are winning as a result of Amazon’s e-commerce slowdown.

Pros and Cons to Buying Walmart Stock Ahead of the Holidays

Source: Shutterstock

Stocks Winning as Amazon Stock Falls: Walmart (WMT)

The first pick on this list is an obvious one. Walmart (NYSE:WMT) is the 400-pound elephant in the retail world that has gradually ceded share to Amazon over the years. But, that trend has sharply reversed course recently.

Over the past several quarters, Amazon’s total e-commerce growth rates (online store sales plus third-party sellers services) have decelerated from the mid-20’s to just 15% last quarter. Given the weak Q4 guide, that growth rate will presumably slow to below 15% in Q4.

Meanwhile, during that stretch, Walmart’s e-commerce growth rates have consistently hovered north of 20% and often closer to 40%. Last quarter, for example, Walmart’s e-commerce sales rose by 40%. Thus, as Amazon’s e-commerce growth has cooled to sub 20% rates, Walmart’s e-commerce growth has sustained itself around 40%.

That means Walmart is rapidly stealing share from Amazon in the e-commerce world. This shifting of market share from Amazon to Walmart was inevitable. Amazon controlled 50% of the U.S. e-commerce market in 2017. Walmart controlled just 4%. In terms of total retail sales, though, Walmart dwarfs Amazon, so as Walmart pivots to e-commerce, its share will naturally grow and Amazon’s share will naturally fall.

Investors should expect this dynamic to persist for the foreseeable future. Consequently, Walmart stock should rise due to sustained robust e-commerce growth as Amazon’s e-commerce business cools.

TGT Stock Holding Up Well Despite Amazon's Domination

Source: Mike Mozart via Flickr (Modified)

Stocks Winning as Amazon Stock Falls: Target (TGT)

The second pick on this list is just as obvious as the first pick. If Walmart is the 400-pound elephant in the retail world, Target (NYSE:TGT) is its 50-pound little brother. Just as Walmart has gradually ceded share to Amazon over the past several years, Target, too, has ceded share. But, just as is the case at Walmart, this market share erosion trend at Target has reversed course recently.

Over the past several quarters, as Amazon’s e-commerce growth rates have slowed to 15%, Target’s e-commerce growth rates have not just remained robust like they have at Walmart, but actually accelerated higher. A year ago, Target’s e-commerce business was growing at a 30% rate. Last quarter, the e-commerce business grew at a 40%-plus rate.

Overall, as Amazon’s e-commerce growth has cooled, Target’s e-commerce growth rate has heated up to industry-leading levels. Among the retail Big 3 of Amazon, Walmart and Target, Target posted the highest e-commerce growth rate last quarter.

This dynamic will persist. In 2017, Amazon had 50% share of the U.S. e-commerce market to Target’s sub-1% share. But, Amazon’s North America retail operations aren’t 50 times as large as Target’s North America retail operations. Instead, Amazon North America retail has about twice the sales volume of Target.

Thus, as the e-commerce market continues to democratize over the next several years, Target will gradually gain share. These share gains will come at the expense of Amazon, so as Amazon’s e-commerce business cools, Target stock should rise.

etsy stock

Source: Shutterstock

Stocks Winning as Amazon Stock Falls: Etsy (ETSY)

This pick is less obvious than the first two picks. Nonetheless, Etsy (NASDAQ:ETSY) is an undeniable winner as Amazon’s e-commerce business slows. The biggest knock against ETSY stock over the past several years is that it doesn’t deserve its valuation because of inevitable “Amazonification.” Eventually, Amazon would copy exactly what Etsy does, and replicate it with greater scale and at lower prices. Sellers would quickly leave Etsy. Buyers would follow suit. The whole Etsy platform would collapse, and ETSY stock would drop.

That hasn’t happened.

Instead, Amazon’s e-commerce business has cooled. In particular, the company’s third-party services growth rate has cooled form 40% and up a few quarters ago, to 30% and slowing last quarter. Meanwhile, during that stretch, gross merchandise sales growth on Etsy has accelerated for four consecutive quarters and registered at a multi-quarter high of over 20% last quarter.

Thus, while Amazon’s third-party e-commerce growth has cooled, Etsy’s gross merchandise sales growth has accelerated.

I don’t think this is a coincidence. Etsy has clearly established a niche for itself as a trusted digital marketplace for the buying and selling of handmade arts and crafts. Amazon has tried to penetrate this market. But, they haven’t had great success. Now, Amazon’s growth is slowing. Etsy’s growth is ramping. Ultimately, that means that as Amazon’s e-commerce business continues to slow, ETSY stock will benefit.

Shopify Stock Could Be on Its Way to Making New Highs

Source: Shopify via Flickr

Stocks Winning as Amazon Stock Falls: Shopify (SHOP)

This may be the least obvious pick on this list, but it also may be the biggest beneficiary of Amazon’s slowing e-commerce growth. Shopify (NYSE:SHOP), which provides e-commerce tools and solutions for retailers of all shapes and sizes, benefits tremendously when e-retail gets democratized.

Ultimately, the Shopify business model hinges on this aforementioned democratization of e-retail. Shopify provides e-commerce tools and solutions for all retailers, but with a heavy emphasis on smaller retailers who aren’t equipped to sell efficiently through digital channels. If there are only 10 retailers in the whole e-commerce world, Shopify’s market is small. But, if the e-retail world starts to look like the physical retail world with millions of retailers, then Shopify’s market becomes quite big.

Right now, we are in the process of Shopify’s market going from relatively small, to huge. In 2017, the top 10 e-commerce retailers controlled upwards of 70% of total e-commerce sales. That is exceptionally uneven distribution. In the total retail world, the top 10 retailers account for just 30%of the total retail sales among the top 250 retailers, and presumably a much smaller share of total retail sales among all retailers.

The biggest driver behind this uneven distribution? Amazon. Now, though, Amazon e-retail is cooling. By a whole bunch. Meanwhile, e-commerce growth rates throughout the U.S. remain as robust as they were a year ago, so that means most of the growth in e-commerce is coming from players not named Amazon, and that the number of retailers with e-commerce operations is growing.

That is a great thing for Shopify. In the long-term, the e-retail environment should look a lot like the brick-and-mortar retail environment in terms of sales distribution, and that means we have lot more democratizing to do. From this perspective, Shopify stock is a big winner as a result of Amazon’s slowing e-commerce business.

As of this writing, Luke Lango was long AMZN, WMT and SHOP.

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Options

A Quick Way to Hedge Your Portfolio Into The New Year

Despite the volatility and heavy stock selling in October, many analysts are expecting the remainder of 2018 to be bullish. The S&P 500 was only up 3% year-to-date after the October bloodbath (prior to mid-term elections), so it stands to reason that stocks are more likely to go up in the final two months of the year than continue to plummet.

Of course, stocks don’t move in a vacuum. There are key factors which could heavily impact the direction of the stock market over the next several weeks. While the impact of the mid-term elections is the most talked about variable, ultimately, interest rate policy may be the more important.

That’s not to say politics don’t matter – they do to some extent. Tax policy matters for certain, although there isn’t likely going to be much change on that front until the next presidential election. Tariffs matter and we’ve seen what impact they can have on quarterly earnings. This week’s election could possibly have an impact on tariff policy, although there’s nothing definitive in that regard.

On the other hand, what the Fed says at this week’s FOMC meeting could have a more meaningful effect on the market. Most importantly, if there’s a definitive statement on interest rate increases or lack thereof, we could see a major shift of funds between asset classes. In other words, stocks could move quite a bit either way if the Fed says anything unexpected.

Getting back to my original statement, it does seem like most analysts are leaning bullish for stocks once this week is in the rearview mirror. It could simply be a matter of having a significant amount of uncertainty resolved, regardless of the results.

I tend to agree that the markets should see a significant downturn in volatility for the rest of the year, pretty much no matter what happens with the Fed and elections. What happens with stocks is a bit more of a toss-up.

In the options market, I’ve seen quite a bit of action betting on a downturn in volatility – which typically coincides with stocks going up. On the other hand, I did come across a pretty large trade which looks like it could be using a bet on higher volatility as a hedge against an additional downturn in stocks.

The trade took place in iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX), which is by far the most popular exchange traded product for trading market volatility. As a reminder, VXX tracks short-term volatility by trading just the first two futures month of the VIX futures curve.

A strategist placed a large, three-part bullish trade on VXX. Roughly 14,000 January 2019 37-47 call spreads were purchased (buying the 37 strike, selling the 47 strike). At the same time, the call spread was financed by selling January 30 puts (also about 14,000 times). The trade was structured in a way that the trader only had to pay about $0.10 per spread in total.

Basically, anything from $37 to $47 in VXX in January makes money (with the max coming at $47). Any price below $30 at that point loses money. And, anything between $30 and $37 is roughly breakeven. It’s a little risky because of that $30 floor – but volatility also isn’t likely to plunge far below $30 given everything going on in the US right now.

I believe this is simply a cheap hedge against a further selloff in stocks. The short 30 put makes it a bit risky, and not the sort of trade casual traders should make. Still, a VXX hedge through January isn’t a bad idea just in case the markets take a turn for the worse.

In that case, I recommend a basic call spread in VXX. To lower the cost of the spread, we could do a December 21stexpiration instead of January and narrow it to a 5 point spread instead of 10. Moreover, we could use an at-the-money spread like a 35-40 call spread or 36-41 call spread (with VXX at $35).

For example, the December 21st 36-41 call spread (buying the 36 strike, selling the 41 strike) costs about $1.20. That means max loss is just the $120 per spread, breakeven is at $37.20 and max gain is at $41 for $380. Max gain would produce 317% gains, which should help offset some losses from stocks if volatility spikes at the end of the year.

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Source: Investors Alley