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Why the Baby Amazons should continue to outperform

  • EM e-commerce players (Baby Amazons) – Jumia, SEA, Flipkart and Ozon have outperformed Amazon ytd – driven by Covid-19.

  • The pandemic will continue to boost the revenues and valuations of the Baby Amazons to a greater degree than Amazon.

  • We rate Baby Amazons on our Cash Sustainability Index: MELI US, BABA US, 3690 HK, JMIA US are our preferred proxies.

Why the Baby Amazons should continue to outperform
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
13 September 2020
Published byTellimer Research

The Baby Amazons have outperformed Amazon by an average of 63% in 2020. Covid-19 has been kind to the Western e-commerce giants, but even kinder to the Baby Amazons.

Baby Amazons have even greater potential than Amazon in the post-Covid-19 world. EM e-commerce players are replicating the success of Amazon at a faster pace. EM e-commerce revenue grew by an estimated 18% CAGR in 2014-19, but rose by an average of 28% yoy in H1 20 alone. The Baby Amazons’ gross merchandise value (GMV) increased by 30% yoy in the same time period. Some EM e-commerce players outperformed Amazon in yoy revenue growth in 1H20.

The drivers of EM e-commerce have become stronger in Covid-19. Internet penetration in the EM world has leapt forward, powered by cheap data. In India, Jio has cut data costs by c97% in 2020. Moreover, smartphones have increasingly become the main way of accessing e-commerce.

The revenue and valuation gap could narrow in five years. Although EM e-commerce firms have just one-tenth of Amazon’s US$335bn GMV, we think the ratio could narrow to one-fifth in just five years’ time. The combined value of EM e-commerce firms is currently just 37% of Amazon’s US$1.6tn market cap – the market is still undervaluing the Baby Amazons.

The Baby Amazons’ cash flow situation is less worrying given the low interest environment. EM e-commerce companies have high costs of goods, opex and capex. Hence, they are negative CFO and FCF. However, risk-free rates have fallen by 60% in the main emerging markets, easing the cash burden.

We rate the companies on our proprietary Cash Sustainability Index (CSI):

BABA US, 3690HK and MELI US fare well on this metric.

JMIA US and SEA US fare poorly, with overstretched balance sheets, but the low interest rate environment means the danger has lessened.

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