(Award-winning tech columnist Jon Markman publishes of Strategic Advantage, a popular daily newsletter about the digital transformation of business, entertainment and society — and how to invest in it. Click here for a free two-week trial.)
The growth of online shopping is probably peaking right now and that is bad news for shareholders of many ecommerce companies. Investors should switch out to Facebook ((FB) -Get Report).
Adobe Systems ((ADBE) -Get Report) released on Saturday the first look at online Black Friday sales. Shoppers spent $9 billion, up 21.6% from a year ago. Unfortunately the comparisons will get more difficult moving forward.
It’s time for investors to look for sales growth in unconventional places.
To be clear, the current state of ecommerce is robust. The global pandemic pushed millions of new consumers online. By all accounts they became comfortable quickly.
The Adobe Digital Insights survey revealed that 41% of shoppers started their holiday buying well ahead of Black Friday. Analysts also noted that consumers are likely to continue spending online throughout the yuletide season as they mix gift buying with necessities and nonessential items.
The transition online illuminated many smaller ecommerce businesses that had been hiding in the shadow of Amazon.com ((AMZN) -Get Report). As they emerged the new attention produced big gains for shareholders. Farfetch ((FTCH) -Get Report), Wayfair (W) and MercadoLibre ((MELI) -Get Report) shares are up 418% 185% and 164% respectively in 2020.
However the global rollout of COVID-19 vaccines means many shoppers will soon head back to brick and mortar stores sooner than most expect. Online sales growth should slow, perhaps dramatically. Share prices for some ecommerce companies are likely to follow.
Facebook is building a new ecommerce platform with the potential to produce billions in new sales. Those gains will drive the share price for the foreseeable future. The good news is so far investors are none the wiser.
On Monday the San Francisco, Calif.-based company announced the acquisition of Kustomer, a software company that builds chatbots and other tools to help small businesses run stores online. The rumored $1 billion purchase price is another big tell that Facebook is going all-in on member stores.
Facebook is engrained in social consciousness. Members use it because it is where friends and family live online. Leaving the community makes keeping in touch in a digital world untenable.
Through the first quarter of 2020, Statista reports that 2.6 billion members login at least once a month. That figure jumps to 3 billion with the addition of core properties, WhatsApp, Instagram and Facebook Messenger.
The opportunity is managers are now in the process of monetizing these platforms beyond advertising.
Facebook Shops, introduced in May will help members across Facebook and Instagram create contained, end-to-end ecommerce stores. It’s not hard to imagine members sharing photos of products on Instagram and Facebook Groups, then completing online sales in Shops using Facebook Pay, its digital payment processor.
The last part is key. Facebook managers intend to keep member payment credentials inside Pay to help with portability between Facebook and Instagram. This means no annoying logins or hand-offs to third party processors to detract from the experience. It also means complete control of the user experience.
Through the first half of 2020 more than 80 million businesses used Facebook to connect with customers. That number is certain to grow as Facebook managers make it even easier to build storefronts and process payments. And the growth of this new revenue stream should provide several years of favorable comparable numbers because sales are beginning from a very low point.
When Facebook reported financial results April 29, 98.3% of the reported $17.4 billion in sales came from advertising.
It may seem counterintuitive to close out long positions in emerging online retailers like Farfetch, Wayfair and MercadoLibre in favor of Facebook. It feels like trading something for nothing. The reason this trade makes sense is sales growth, and the way momentum stocks are valued in the marketplace.
Slower growth is a death knell for momentum issues. It means much lower prices.
Adobe Digital Insight analysts crunched through billions of data points across 100 million product SKUs. The data is bullish overall for online sales moving forward yet that will not be enough for most high flying ecommerce stocks.
Investors should consider taking profits in most of these issues and making a new investment in Facebook.