Earnings Watch: E-commerce earnings to show high growth in Q4

Can strong earnings from e-commerce continue?

E-commerce stocks have done extremely well during the pandemic driven by necessity from consumers with limited buying options in the physical world. As we wrote back in November, the Q3 earnings from 48 of the largest e-commerce companies in the world showed 30% revenue growth y/y although return on invested capital as a group is negative (it is positive for the 10 largest e-commerce companies). Analysts are very positive and the overall index weight in global equity markets is around 4% so there is plenty of room for more growth. But e-commerce stocks come with an expensive valuation as growth is not cheap these days.

Amazon is expected to report 37% revenue growth and 61% growth in earnings fueled by strong consumer demand and strong growth in its cloud business AWS, but we expect growth rates to come down meaningfully from current levels as major economies lift restrictions with the rollout of vaccines. Alibaba is expected to deliver 33% revenue growth y/y and 48% earnings growth y/y demand driven by strong rebound in consumer spending as China has managed the pandemic without impacting the economy too much. The quick question is whether investors will care about Alibaba’s strong result as the recent government crackdown on monopolies including Alibaba has caused global investors to worry about how it will limit future growth and profitability of Alibaba.

We expect a strong quarter for Alphabet as its Google search engine division has likely had a good quarter given the good numbers Facebook reported on online advertising last week and the good numbers on cloud business from Microsoft. Earnings are expected to be up 21% y/y but the last six quarters have seen volatile earnings growth figures from Alphabet and investors are generally not as positive on Alphabet compared to five years ago. The company needs a new major product besides search and cloud to maintain the love of investors.

UPS is probably the most interesting earnings release because of its link to our reflation theme announced in early January and the soaring logistics costs that we have regularly mentioned in our daily Saxo Market Call podcast and in a research note back in November. In our research note from December on logistics companies Are logistic companies long-term winners? We show that a basket of global logistics companies have outperformed the global equity market over the past nine years. Demand is soaring for logistic services in a globalized world and increasing e-commerce is the main driver increasing profitability and large-scale global logistics operations come with a good moat to protect these companies against competition. UPS is expected to deliver 11% revenue growth y/y but no earnings growth which we find too pessimistic by analysts. UPS has recently sold its freight business to TFI International in a streamlining of the business under the slogan of “better not bigger” with UPS focusing more on creating a more efficient logistics network around e-commerce.