BANK OF AMERICA: Buy these 7 online retailers set to soar as these 'structural winners' build on their 2020 gains — including one with a 41% upside

  • E-commerce was one of the big coronavirus winners as consumers were forced to buy online.
  • But these gain are set to continue into 2021, according to BofA.
  • Here are the 7 companies who are ‘structural winners’, the firm said.
  • Visit the Business section of Insider for more stories.

The coronavirus pandemic has changed the face of consumer spending, as lockdowns and restrictions on movement have dampened the pace business for traditional brick-and-mortar firms, and have created a new breed of stock-market winners among the online retail sector.

The sector’s success is not only due to the tailwinds from the shift in consumer behavior due to the pandemic, according to Bank of America. Moreover, companies in this space are “structural winners” that can anticipate more strong returns in 2021, the bank’s equity strategists, including David Holmes, wrote in a note on Tuesday.

“We believe the pandemic has irreversibly accelerated changes in consumer behaviour… We believe these businesses are not simply pandemic beneficiaries, they are structural winners,” the note said.

2020 was an exceptionally strong year for these companies, including UK online fashion retailers Asos and boohoo, which posted 28% revenue growth, the note said. With customers forced to take purchasing online during national lockdowns, this is unsurprising, but Bank of America says this isn’t a one-off.

2021 is set to be another robust year for business, Bank of America said. The bank is forecasting average revenue growth for its seven e-commerce stars of 2021 of 22%.

Investors are already rewarding some of the better performers. For example, ASOS has outperformed London’s FTSE 100 index by as much as 56.44% in the last year alone.

These seven online retailers added approximately 25 million customers between them during 2020, which represents the strongest year of customer acquisition ever, BofA estimates – nearly double the customers acquired in 2019.

This massively expanded constumer base will be a key driver of growth in 2021, as e-commerce companies start to monetize this customer base over an entire calendar year.

“Given the magnitude of this new cohort across our coverage we believe successful retention in 2021 can drive significant growth,” the firm added.

What does a “good” e-commerce company look like?

Preferable e-commerce companies will have one, or all, of these attributes, according to BofA:

  • Operators with asset-light platform/concession models
    • This model underpins longer term margin expansion, BofA said, pointing to Farfetch, Zalando and THG (specifically Ingenuity) as exemplifying these features.
    • Where asset-light models do not exist, so-called 1P models are preferable, for example Boohoo, whereby the operator acts as retailer, and brands are wholesale suppliers.
  • Strong growth potential
    • E-commerce businesses that operate in categories with the largest growth potential are preferable, the firm said, for example, big markets with low on-line penetration. Online pharmacies like Zur Rose and Shop Apotheke are good examples, BofA added.
    • An additional tailwind form 2020 has been the decline in product returns, BofA noted, something that is typically driven by so-called “going-out” products like dresses and shirts. With demand for these products suppressed during lockdown, customers have purchased “stay-at-home” items with traditionally much lower return rates, like casual wear.

      These lower returns have reduced distribution costs for companies. BofA estimate that this benefit to e-commerce company Zalando has been “comfortably more than >€100m at the EBIT level,” the firm said. Of course, these lower returns have also boosted revenues, it added.

      These are the seven e-commerce stocks on which BofA have a buy rating and should expect significant price upside this year:

      ASOS

      • Ticker: LON.ASC
      • Price target: 5800p
      • % Upside: 16.23%
      • Upside risks:
        • Faster international expansion that we forecast, particularly in the US
        • Earlier-than-expected margin expansion, notably with leverage on fulfilment and tailwind on warehousing costs
        • Corporate activity
      • Downside risk:
          • Consumer reluctance to transition to e-commerce
          • Brand reluctance to provide products for e-commerce sales
          • Risks around technology shutdowns and logistics problems
          • Privacy breach / loss of data
          • Sharp increase in competitive pressure from new entrants
          • New tax on online retailers in the UK
          • boohoo

            • Ticker: LON.BOO
            • Price target: 470p
            • % Upside: 29.69%
            • Upside risk:
              • New brand additions

              • Earlier-than-expected margin expansion, notably with leverage on fulfilment costs

              • Market share gains for Boohoo in online retail

            • Downside risk:
              • A slowdown in the pace of online retail penetration in Boohoo’s key geographies

              • Damage to the brand equity of the portfolio – poor product development could lead to products being out of date and cause a material decline in sales

              • Boohoo has also been acquisitive, which would mean there are execution and integration risks for new brands

              • Supply chain risks

              • Labour practices are found to be worse than expected.

              • Farfetch

                • Ticker: NYSE.FTCH
                • Price target: $75
                • % Upside: 12.33%
                • Upside risks:
                  • Higher than anticipated revenue growth due to a more favourable macro backdrop or stronger than expected customer adoption

                  • Better cost absorption and operating leverage as the company scales operation

                • Downside risks:
                  • Adverse macro environment and luxury demand, which is typically cyclical

                  • Farfetch’s reliance on partners for pricing and packaging for which Farfetch has no control

                  • Brands deciding to exit Farfetch in favour of their own website or negotiating for lower take rates

                  • Customer concentration – the top 1% of customers represent 26% of Farfetch GMV. Also, VC owners of the shares deciding to exit their positions could bring short-term pressure.

                  • Shop Apotheke

                    • Ticker: ETR.SAE
                    • Price target: €270
                    • % Upside: 18.42%
                    • Downside risk:
                      • The arrival of new competitors such as Amazon that may make it more expensive and difficult to acquire customers

                      • A slower roll-out and take-up of online prescription medicines than we currently model.

                      The Hut Group

                      • Ticker: LON.THG
                      • Price target: 1,000p
                      • % Upside: 40.98%
                      • Downside risk:
                        • Person risk: Matthew Moulding is CEO and executive chairman and owns a special share which allow him to veto or pass shareholders’ decisions

                        •  THG operates in highly competitive markets (beauty, sports protein and SaaS) and is a relatively new player

                        • Ingenuity: an important part of the thesis and valuation relies on the ability to integrate and scale THG Ingenuity, which is still nascent. – M&A: a part of THG’s growth story is based on acquisitions, which could be made at excessive prices or fail to be integrated

                        • Liquidity: The free float is only 20% and we cannot exclude large shareholders selling their stakes going forward

                        • Regulation: increased scrutiny on the online sector could lead to stricter regulation

                        Zalando

                        • Ticker: ETR.ZAL
                        • Price target: €115
                        • % Upside: 16.02%
                        • Downside risk:
                          • A risk to the Zalando’s PO would be greater consumer reluctance to transition towards e-commerce than we anticipate. Online retail remains very competitive, which could result in higher-than-expected promotional investment requirements. Either of these issues could lead to GMV growth behind our forecasts, which we believe would disappoint investors and cause a de-rating in valuation given the close relationship between anticipated revenue growth and the Zalando multiple. If the Zalando Partner Programme fails to deliver its expanding share of GMV or due to our assumptions regarding margin trajectory in that division being inaccurate our longer-term forecasts may prove too optimistic. There are also risks associated with commission rates within the Zalando Platform Model.

                          Zur Rose Group