The best answer to the above question is that there are some online retailers that meet the definition of a classic value investment; that is, they consistently make money, and their stock is relatively cheap.
These companies can be located by looking at individual companies rather than the sector as a whole. Online retail is a very messy and complex business with many players, some of which can be characterized as value investments or potential value investments.
A Potential Value Investment in Online Retail
A good example of an online retailer that can be characterized as a potential value investment is Alibaba Group Holdings (NYSE: BABA). Alibaba can be considered a value play because it makes money, and it is growing. It offers investors a good potential for growth at a low level of risk.
The Chinese ecommerce giant reported a net income of $3.918 billion (€3.61 billion) on March 31, 2015. It also reported a profit margin of 16.6%, a TTM revenue of $12.33 billion (€11.36 billion) and a return on equity of 24.54%. Alibaba’s growth has also been phenomenal; the company reported a revenue growth rate of 41.68% on March 31, 2015.
Yet Alibaba can be considered something of a value because it constantly trades at a much lower share price than its American rival, Amazon.com Inc. (NASDAQ: AMZN). In early morning trading on July 17, 2015, Alibaba was fetching $82.73 (€76.21) a share, while Amazon was trading at $479.24 (€441.50). Amazon is clearly not a value stock because it is overpriced, and it loses money.
Amazon reported a net income of -$406 million (€374.02) on March 31, 2015, even though it managed to generate revenues of $91.96 billion (€84.72). Alibaba reported a net income of $3.918 billion (€3.61 billion) from revenues of $12.33 billion (€11.36 billion). That means Alibaba managed to convert nearly one third of its revenue into income. Amazon does not seem to be able to do that.
The moral of the story is that online retailers can display some of the characteristics of a value investment. They can generate income and returns for investors. Alibaba provided investors with a return on investment of 24.54% and a diluted earnings per share of 1.589 on March 31, 2015, although it did not pay any dividends.
The other important lesson here is to look at the company’s financials rather than the media hype. A quick look at the financial numbers shows that Alibaba is a pretty good stock, while Amazon.com is a very lousy investment. To spot the true values in online retail, one must judge companies individually.
A Value Investment in Online Retail That Could Be Growing Faster Than Amazon.com
Alibaba is a good stock, but is not a pure value play because it pays no dividend and it has little cash. Alibaba reported a free cash flow of -$357.58 million (-€329.42) on March 31, 2015, which means it had no extra cash at the end of the fourth quarter of 2014. Like most online retailers, Alibaba takes substantial risks, which can lead to growth but scares off traditional value investors.
Fortunately, there is a way that traditional value investors can take advantage of online retail. It is to buy shares of a healthy but underpriced traditional retailer like Walmart Stores Inc. (NYSE: WMT) that has a successful e-commerce operation. Walmart is a very profitable company with a lot of cash that has a fast-growing online retail business.
Sales at Walmart.com grew by 17% in the first quarter of 2015 and by 22% in the 2014 fiscal year, Internet Retailer reported. Walmart.com’s sales grew by 21% annually between 2009 and 2014.
That indicates Walmart.com is actually growing faster than Amazon.com, which reported a revenue growth rate of 15.08% on March 31, 2015. Internet Retailer estimated Walmart’s global online sales at $12.126 billion (€11.17 billion) in 2014. If that figure is true, Walmart.com’s revenue is close to that of Alibaba, which reported revenues of $12.33 billion (€11.36 billion).
In addition to its growth, Walmart also makes a lot of money. It reported revenues of $485.52 billion (€439.90 billion), a net income of $16.11 billion (€14.60 billion) and a free cash flow of $2.43 billion (€2.24 billion) on April 30, 2015. That gives Walmart the resources to grow its online business without having to take on debt—a luxury most online retailers do not have.
Walmart is planning to spend $1 billion (€920 million) in e-commerce and digital initiatives this year and $1.2 to $1.5 billion (€1.11 to €1.38 billion) on online retail improvements in 2016, a press release indicates. That spending is enabling it to create an e-commerce ecosystem that could rival Amazon’s.
Walmart opened four e-commerce fulfillment centers in the United States in the second quarter of 2015, The Wall Street Journal reported. Each of those centers is one million square feet (304,800 meters) in size and can hold up to 500,000 items.
These investments may have paid off; a number of American media outlets reported that Walmart’s performance exceeded that of Amazon on Prime Day on July 15, 2015. Prime Day was a massive sale Amazon held to celebrate its 20th anniversary. Yahoo Finance writer Rick Newman reported that Walmart.com offered a better selection of merchandise, a superior shopping experience and a site that was easier to navigate.
A Value Play in Online Retail
Now for the truly good news: Walmart is also a really good stock that pays out to investors. Unlike Alibaba and Amazon.com, Walmart actually pays a dividend. It reported a dividend yield of 2.63% on April 30, 2015. It also offered investors a return on equity of 20.77% and a diluted earnings per share figure of 4.971.
Best of all, Walmart is also a very cheap stock for its value. On July 17, 2015, it was trading at $73.79 (€67.98) a share. In other words, it was nearly $10 (€9.21) cheaper than Alibaba.
So yes, folks, online retail can be a value investment if you are willing to do your homework and look beyond the media hype. Walmart proves that there are some real value investments in the world of online retail.