2021 Themes: How the e-commerce bubble is set to burst

2021 Themes: How the e-commerce bubble is set to burst

  • The pandemic brought forward revenue for tech firms that can never be replicated
  • Prospects of a vaccine could bring a return to fashion for value stocks
  • If the illusion of non-financial metrics is shattered, the e-commerce bubble could burst

The tech bubble has inflated to bursting point in 2020. The FAANG companies have come to dominate the S&P500 and their cousins in emerging markets (the Baby Amazons for example) have outperformed the MSCI EM Index by 54% (as at 20 November).

These stocks have been bought for the unusual defensive qualities they offer in this unique Covid-induced global recession. The stay-at-home stocks that provide e-commerce, streaming video and social media have benefited from the pandemic and seen an upsurge in revenue.

But 2021 could be the year that the stock market tires of high-growth tech stocks. Instead, after a long period out of favour, three factors suggest we are poised for a great rotation with value stocks returning to fashion.

1) Vaccine will switch investors away from growth

For most of 2020, the market has chased anything that has sales momentum, while traditional value stocks languished in their wake. The vaccine announcements improve the allure of value stocks and the market drivers have shifted sharply to value.

2) The pandemic brought forward revenue that can never be replicated

There is no doubt that technology adoption was occurring before Covid. The trend of increased online shopping and more frequent remote work was already well underway, and should continue.

But the pandemic created one-off revenue from a once-in-a-century pandemic. E-commerce companies recorded a huge surge in gross merchandise value (GMV) while stay-at-home companies such as Zoom and Netflix became essential elements of pandemic living.

Q2 20 GMV QoQ growth vs share price performance

However, the massive growth seen during the pandemic is not sustainable. Investors will eventually make the distinction between pandemic revenue and recurring revenue.

Zoom is a glaring example of the exaggerated growth. It has generated 200mn users, representing a 20-fold rise since the start of this year. Its revenue increased 350% yoy in Q2 20. These numbers will not be sustainable after the pandemic.

Similarly, digital entertainment firm Sea Limited’s GMV growth has fallen in Q3 20 compared to Q2 20. The lockdown has eased in Southeast Asia and the hockey stick type growth seen at the peak of the health crisis is evaporating.

As the pandemic eases in 2021, the tech names will struggle to live up to the elevated expectations. Sea Limited (SE US) is trading at 20x revenue, which is more than five times the average for EM e-commerce players. Such exaggerated growth expectations are simply not sustainable.

E-commerce Comparables

3) The power of the tech companies' magic tricks seems to be waning

The tech boom has been built on the projection of non-financial metrics. Traditional financial metrics such as earnings growth and cash generation have been ignored by both managements and markets. This is especially the case in emerging markets.

For instance, Sea Limited has become Asean’s largest company, having risen four-fold in 2020. Yet even though it is loss-making and is unlikely to be cashflow positive for many quarters, the stock keeps rising on non-financial metrics. In its quarterly results, the market focuses on line items such as number of users or hours of usage.

The trouble with non-financial metrics is that they are even more susceptible to manipulation than financial ones. Muddy Waters recently accused the Chinese video streaming company Joyy of faking its usage numbers. Muddy Waters’ founder Carson Block says that Joyy’s YY Live platform is 90% fraudulent, and in a 71-page report states that YY Live’s paying fans were fake users. Also, he alleges that the users of the platform have not earned the revenue that the company states.

The scrutiny of emerging market tech firms may increase if these allegations prove to be correct, and there could be other skeletons in the EM tech cupboard (the manipulation of non-financial metrics could even be the prelude for abuse of financial metrics). The Joyy scandal could shatter the illusion of non-financial metrics, which in turn could finally burst the tech bubble.

Read all of our 2021 Global Themes here.


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