Why e-commerce stocks fell short in 2021

While many areas of technology, including semiconductors, video gaming, and autonomous driving, continued to deliver strong returns for investors in 2021, e-commerce stocks disappointed. In this sector, both major players such as Amazon and Alibaba, and smaller, up-and-coming players such as online fashion retailer ASOS and pet supplies retailer Chewy, underperformed the broader market by a wide margin.

So, what went wrong with e-commerce stocks in 2021? And has the underperformance across this area of technology provided a buying opportunity for investors?

Why e-commerce stocks underperformed in 2021 

There are a number of reasons online shopping stocks generated poor returns in 2021.

The first is that the industry was — and continues to be — plagued by a wide range of supply chain issues brought on by the COVID-19 pandemic.

Early on in the pandemic, many shipping companies reduced capacity in response to lower levels of demand. This caused major logistical problems when demand for consumer goods picked up several months later, and there is still a supply and demand mismatch today.

Bottlenecks at US ports due to coronavirus-related staff shortages have compounded the shipping crisis. In September 2021, a record 65 cargo ships were forced to queue outside America’s two largest ports. Before the pandemic, it was unusual for more than one to wait for a berth.

A shortage of truck drivers has also disrupted supply chains. This has been an issue both in the US and Europe. Finally, a lack of warehouse space has also been a problem.

All of these issues have combined to create the perfect storm for retail supply chains. As a result of these challenges, many retailers have not been able to get goods to customers in a timely manner.

Higher costs have hit profits 

Another reason e-commerce stocks have tanked is that higher costs have hit profits. Due to the supply chain disruptions, many retailers have been faced with significantly higher freight and storage costs. In the US, data from the Bureau of Labor Statistics showed that the costs of transportation and warehousing goods for final demand jumped more than 18% year-on-year in November. That represented the largest annual increase since 2009.

Meanwhile, retailers have also had to deal with increases in the prices of raw materials and wage hikes for workers. These higher costs have had a big impact on earnings. Amazon, for example, posted net income of $3.2 billion in the third quarter of 2021, down from $6.3 Billion a year earlier.

A return to physical stores 

Of course, the reopening of the global economy has also had an impact on online retailers. Consumers have been able to return to physical stores, and this has meant that top-line growth across the e-commerce industry has slowed down after a strong year in 2020, when consumers were forced to shop online due to lockdowns.

Chinese regulatory uncertainty 

In the case of Chinese companies such as Alibaba and JD.com, these stocks have been hit by regulatory uncertainty. Over the last year, Chinese authorities have been cracking down on dominant technology companies. In April 2021, for example, Chinese regulators hit Alibaba with a record fine of $2.8 billion for abusing its dominant market position. This kind of action from regulators has impacted sentiment towards Chinese e-commerce stocks.

Is this a buying opportunity? 

Often, when a certain sector or area of the market experiences a large fall, we see a sharp rebound not long afterwards. We’ve seen this in recent years with both oil stocks and bank stocks. Both tanked in early 2020 as the pandemic took hold. However, in 2021, oil and financials were two of the best-performing sectors in the market. Those who, in the words of Warren Buffett, were “greedy” when others were “fearful,”, and bought stocks in these sectors when they were out of favour, generated strong gains.

Could the dip in e-commerce stocks be another opportunity for contrarian investors? Quite possibly.

In the near term, supply chain issues and higher costs may linger. However, eventually, these issues should clear up as imbalances brought on by the pandemic moderate. Automation should help. Many e-commerce companies, including the likes of Amazon, ASOS, and online supermarket Ocado are investing heavily in automation technology in order to streamline their supply chains.

Meanwhile, in the long run, the future looks bright. Driven by advances in payments technology, rising Internet and smartphone penetration, and the increasing popularity of social media, the global business-to-consumer (B2C) e-commerce market is projected to grow by around 10% per year between now and 2028 to reach $7.7 trillion.

It’s worth noting here that the pandemic has accelerated the shift to online shopping by several years. Today, around 60% of shoppers say that they prefer online grocery shopping to shopping physically, compared to just 45% in November 2020.

The shift to working from home is also benefitting the e-commerce industry. Those who work from home often tend to shop online due to the level of convenience it offers. This is spurring a “delivery economy” for consumer goods that’s expected to get much bigger in the years ahead.

Investing in e-commerce stocks 

Those wishing to invest in e-commerce stocks may want to consider eToro’s ShoppingCart Smart Portfolio. This is a fully allocated portfolio that provides exposure to a range of top e-commerce stocks including Amazon, eBay, Etsy, and Alibaba.

An alternative strategy to consider is the FashionPortfolio. While this portfolio is focused on fashion stocks, it contains a number of pure e-commerce retailers such as Farfetch and Zalando, as well as companies that are ramping up their e-commerce operations such as Nike and Macy’s.

This communication is for information and educational purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without taking any particular recipient’s investment objectives or financial situation into account, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to the past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the contents of this publication.