Are e-commerce stocks a good investment?

Canada’s e-commerce sector has been soaring even before the COVID-19 pandemic hit in 2020. Shoppers across the country had started availing services delivered at their doorstep, giving retail sector a jolt to its operations.

According to some reports, retail ecommerce growth nearly exploded in 2020 as stay-at-home restrictions kept Canadians at home, and technology growth allowed digital channel sales to thrive.

The sectors gaining largely from the sector’s expansion included the food, apparel, pharmacy retail segments. With their large operations and penetration in the digital market space, these stocks have also grown to acquire a large market cap in 2020.

For instance, e-commerce business-to-business player Shopify Inc. (TSX:SHOP), the second largest company on the Toronto Stock Exchange (TSX) based on market cap, has listings by over million merchants. Its market cap was worth about C$ 188 billion at closing bell on Friday, June 11, 2021. While Docebo Inc. (TSX:DCBO), Canada’s leading artificial intelligence-backed learning software company, commands shareholder stake worth C$ 2.2 billion.

Apart from these two, the other key players in Canada which run parallel to US’ FAANG—Facebook, Apple, Amazon, Netflix and Google--include Open Text Corporation (TSX:OTEX), Constellation Software Inc. (TSX:CSU), and Kinaxis Inc (TSX:KXS).

Looking at this trend, let’s check if the Canadian e-commerce sector is likely to make investors rich going forward.

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Is e-commerce likely to be a good investment going forward?

Most macroeconomic indicators imply a favorable position for the Canadian e-commerce industry. Major players like Shopify, and Open Text Corporation, have already reaped the benefits of these trends keeping their profits upbeat. The two companies grew about 53.7 per cent and 8 per cent in the last one year, respectively.

However, e-commerce growth depends highly on a company’s adaptability to change. Digital sales hinge on faster technological advancements to allow ease of access to its users, as companies including Docebo did in 2020. The AI-backed learning software developer made consistent advancements to improve their offerings from pre-pandemic times. It also recently added learning analytics to its portfolio, which will target professionals and help with better implementation of learning from the training programs on their business outcomes.

Similarly, Open Text Corporation’s cloud-based services surged on the back of its continued pacts with large corporations, which pushed the company to up its technological offerings to keep its order pipeline robust. The Ontario-based company holds a market capitalization of C$ 16.5 billion as of June 14, 2021 and was recently recognized as an overall leader in the 2021 customer communications management industry.

While looking for technological leaps in product offerings is central, the growth of e-commerce players also depends largely on the changes in consumer behaviors triggered by COVID-19 infections in Canada.

Digital channel growth strengthened, but easier restrictions on movement means that retail buyers may just rush back to brick-and-mortar outlets to find some sense of pre-pandemic normalcy. This applies primarily to apparel and food e-commerce companies.

Some industry experts say that despite the pandemic and longer-than-expected stay-at-home restrictions, the appeal of retail outlets may remain unparalleled for customers. This preference may remain as retail stores offer touch and feel of products, essentially inaccessible through digital channels. 

Is the market looking favorable for e-commerce sector in Canada?

E-commerce has certainly benefitted from the pandemic, making 2020 one of the most remarkable years for innovation in online sales.

As Canadians await further easing of restrictions on movement after the third wave of the pandemic, it is notable that the spread of COVID-19 is not over yet. Even though vaccination rollout may dampen the speedy growth in the sector in future, infection worries may not fade out just yet.

According to a report published in late May, only less than five per cent Canadians were fully vaccinated, and over half had received partial immunized.

Therefore, it is less likely for customers to simply jump out of their homes for every non-essential requirement, keeping e-commerce sector stocks upbeat at least in the near term.

However, companies with diversified offerings like Constellation Software may not be impacted after the easing of curbs as their software-based services remain a key constituent of operations.

E-commerce companies need to develop such post-pandemic immunity like Constellation, whose stock rose 20.2 per cent in the last one year and is likely to tread on growth path due the wave of accelerated digitization in commercial operations. The C$ 37.7-billion company offers software-related services to both public and private sector players. A changing environment in terms of movement may require such software players to diversify their operations, but their long-term contracts and adaptability is likely to keep these stocks growing robustly even in the medium-to-long term. 

Which are some good e-commerce stocks to look at?

As discussed above, the major e-commerce players in Canada include

• Shopify Inc.
• Docebo Inc
• Open Text Corporation
• Constellation Software Inc.
• Kinaxis Inc.

While the Canadian market is replete with other e-commerce players, these stock leaders may be a good investment to begin with as their fundamentals seem strong.

Shopify, the cloud-based B2B e-commerce platform, has kept its investors hooked right since its public listing, the company offers a price-to-earnings (P/E) ratio of 91.70, and about C$ 16.56 earnings per share (EPS).

Kinaxis Inc., a Canada-based software services provider for supply chain management, has inventory management operations spread across North America, Europe and Asia-Pacific regions. It commands a C$ 3.8 billion market cap, and a 466.80 (P/E) ratio.

Docebo’s business-related e-learning offerings have helped the company touch a 52-week high of C$ 86.64, about 22.4 per cent higher than its last close on Friday, June 11, 2021.

Open Text’s cloud-based operations have also been robust in the last one year, with its last close stock price of C$ 6045, as of June 11, 2021, hovering around its 52-week high of C$ 64, which it hit in August, 2020.

Constellation Software also offers a solid P/E ratio of 86.50, and a 42.38 per cent return on equity.

Please note: The above constitutes a preliminary view and any interest in stocks should be evaluated further from an investment point of view. The reference data in this article has been partly sourced from EODHD/Others.