After a material growth slowdown since summer 2021 when most geographies exited Covid restrictions and consumers found their way back to physical stores, the US e-commerce and digital payments ecosystem showed signs of bottoming out in the Q2 earnings season. Amazon (North America), eBay, Farfetch, Etsy, PayPal among others all reported improving growth metrics in Q2 compared to Q1 (albeit at low levels) and/or an improving margin outlook, sparking some EPS upward revisions for the first time in a year.
This confirms our previous view (May 2022) that most of the e-commerce slowdown is now behind us and that online retail growth is on the verge of reaccelerating towards more normalized levels.
The latest data from the US Census Bureau give increased confidence in this momentum. Online and other non-store sales were up 18.1% year-on-year in July, well above previous months (e.g. 5.2% in March, 11.3% in April) thanks to an easier comparison basis. Considering that comparisons will ease further over the next couple of months (only 10% growth in August – September last year and 7% in October), growth in online transactions should soon settle around 20% in our view, a level in line with the pre-pandemic growth momentum.
Importantly, we believe that these easier comps could overshadow some macro weakness and that consensus expectations already factor in many of the current macro challenges and point to limited downside for top-line expectations, provided we do not head into a hard landing scenario.
At the bottom-line level, the cost inflation risk will need to be monitored, specifically for e-commerce companies (logistics, packaging, labor), but cost discipline and restructuring measures should help offset most of the impact.
In conclusion, after a year of hyper-charged growth (2020 – early 2021) and a year of slowdown (since Q2 2021), a more normalized environment should give investors more comfort in assessing and valuing e-commerce and fintech assets. Interestingly, it’s not only about US companies: Chinese e-commerce companies such as Pinduoduo and Meituan also seem to be bottoming out with a growth reacceleration and margin upside in their latest quarterly reports, and could benefit in coming quarters from reduced government pressure.