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Pandemic dividend fades into a distant memory for ecommerce

Remember the tech industry’s pandemic dividend?

The idea that tech companies would gain a lasting boost by being forced to use their services during the lockdown was a major factor in the latter part of the tech stock boom. In some corners of the industry, however, hopes of a lasting Covid-19 effect have faded.

Nowhere is this more true than in e-commerce. After last week’s recent slump in tech stocks, Amazon’s share price has finally returned to pre-pandemic levels. Exchange-traded funds that track the e-commerce sector have performed even worse, with the Amplify Online Retail ETF down 20 percent from where it was during the Covid-19 era.

What happened to the idea that the new online shopping habits people had to learn during the pandemic would lead to a permanent change in consumer behavior? And what about the belief that changes in things like work life and home entertainment would provide a lasting boost to the fortunes of some tech companies? Shares of video conferencing service Zoom are also back to where they were at the start of the pandemic after a wild ride that saw them rise more than fivefold. Shopify, which provided a platform for retailers who needed to sell online in an emergency, is down a third from pre-crisis levels.

Across the tech industry, companies that were looking forward to a sustained surge in digital demand need to consider whether the pandemic has truly pushed their sales to a plateau from which to continue growing at historical rates. There’s even a risk that the crisis has brought forward some sales that would have happened in the coming years, leaving an even bigger hangover — something that may have happened in some areas of IT.

Online shoppers are more than happy to return to the store: if the convenient one-click shopping experience has spawned an army of e-commerce converts, it’s hard to tell in the aggregated data. In the US, e-commerce grew from 12 to 16 percent of retail sales in 2020. However, by the first quarter of this year it had fallen to 14 percent – pretty much in line with the longer-term growth trend for the pre-Covid-19 sector.

As the one-time upsurge in online shopping wanes, annual sales numbers are dampening this year’s growth numbers. Wall Street expects Amazon’s e-commerce growth to fall below 10 percent — a far cry from 2020’s 39 percent growth.

These numbers may still hide a small, ongoing pandemic effect. Jefferies analysts point out that Amazon is expected to achieve a three-year average growth rate of about 20 percent for 2020-2022, compared to the 18 percent growth reported in the year before the crisis, indicating a minimal increase.

But as financial and economic conditions change, other factors are quickly taking over, making the outbreak of the pandemic a distant memory in markets like e-commerce.

One is a decline in valuation multiples that Wall Street is willing to bet on tech growth, nullifying more than a small pick-up in underlying digital demand. Amazon now trades at about 2.1 times sales, compared to 2.8 times sales in early 2020.

How far multiples will withdraw is still open. After a 10-year bull run, tech stocks were already high before the pandemic hit, so there’s no reason why a drop to pre-pandemic levels should represent any bottom.

The other factor is the economy. The tremors in global supply chains have held back sales. Rising labor and fuel costs increase the cost of fulfilling online orders. The sudden, sharp change in the interest rate outlook has called into question the continued strength of consumer spending.

The result is pressure on sales growth and profit margins for a company like Amazon. To make matters worse, the e-commerce giant missed its recent investment spree. Wall Street has long been accustomed to spending spurts as Amazon adds the warehousing and distribution capacity to handle the next phase of growth. But last year’s $61 billion in capital expenditures — more than 50 percent up from the year before — proved to be a big, ill-timed leap.

The net result is an expected halving of Amazon’s adjusted operating profit margin from 9.3 percent last year. Things should improve as the company grows into its higher cost base and annual revenue comparisons become less difficult. But until then, the pandemic boom will be a distant memory.

richard.waters@ft.com

Pandemic dividend fades into a distant memory for ecommerce Source link Pandemic dividend fades into a distant memory for ecommerce

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