Thursday, September 29 2022

E-Commercial stocks have been destroyed this earnings season.

Normally reliable names like Amazon (NASDAQ: AMZN) and Shopify (NASDAQ: SHOP) fell sharply on earnings, with Amazon even reporting a slight drop in first-party sales. Etsy experienced a decline in gross merchandise volume, and eBay and Wayfair both reported lower incomes.

It is clear why the industry is hitting a wall. The first quarter of 2021 was the last full period before COVID-19 vaccines were available to the general public in the United States. In the second quarter, the economy began to “reopen” and consumers began to return to pre-pandemic habits, such as shopping in stores. rather than online.

Despite these headwinds, an e-commerce stock posted an outstanding report in the first quarter. GXO Logistics (NYSE: GXO) has just posted organic revenue growth of 19%. It also raised its full-year revenue forecast, predicting organic growth of 11% to 15% in 2022.

Image source: GXO Logistics.

A win-win e-commerce

GXO is the world’s largest pure-play contract logistics company. It operates high-tech warehouses for multinational companies like Apple, Nestleand Crossroads. from XPO logistics (NYSE:XPO) As of last August, GXO is not a retailer, but it still offers significant exposure to the e-commerce sector. 70% of the company’s sales pipeline comes from e-commerce, omnichannel retail and consumer technology companies.

These companies look to GXO to outsource logistics, but the company’s exposure to both e-commerce and omnichannel has dampened the headwinds of online retail, as many of its customers have saw demand shift to physical stores. For GXO, this has made no difference to its business, as products are still shipping, and GXO will benefit from the growth of omnichannel and e-commerce.

The company remains bullish on e-commerce and its investments in areas such as reverse logistics or returns handling also make it attractive for retailers selling online. Much of its growth with existing customers came from e-commerce in the first quarter.

First-time outsourcing was also the top driver of new business for the company, showing that GXO is expanding the market for third-party logistics using technologies such as collaborative robots, robotic picking arms , vision technology and software.

A recession-proof company

GXO operates in the cyclical transportation industry, but the company’s recent results, including its best quarter of new business growth and an increase in its guidance, show confidence in its business for the rest of the year. . Although there are signs of a weakening economy, including a pullback in stocks, rising interest rates and even layoffs at some companies, GXO is experiencing none of these headwinds.

If a recession occurs, the company is prepared. Nearly 40% of its contracts are “cost-plus”, and this will increase to 50% after the completion of the Clipper acquisition in the second half. Cost-plus means that the company charges customers a price based on a fixed markup on its own costs. This insulates GXO from inflationary pressures and also helps protect its margins. The company also has minimum volume requirements in many of its contracts to protect it from downside and uses catch-or-pay clauses, ensuring customers pay a fee if they don’t ship the volumes they’ve agreed to. are engaged.

Chief Investment Officer Mark Manduca also sees a recession as a potential opportunity to grab market share, as a recession would be harder on less efficient competitors, making GXO more attractive in comparison. The company has a history of mergers and acquisitions as part of XPO Logistics, and another benefit of a slowdown would be that target companies would become cheaper, opening up potential acquisition opportunities.

Shopify’s acquisition of Deliverr and Amazon’s launch of “Buy with Prime” show that the challenges of e-commerce logistics are rising as e-commerce companies look to use logistics to differentiate themselves. This trend will favor GXO, a company with nearly 1,000 warehouses worldwide and billions of dollars in investments in technology.

GXO is entering an addressable market worth $430 billion at a double-digit growth rate, and the stock looks well-valued at the moment, trading at a price-to-earnings ratio of just over 20 on the basis of this year’s adjusted earnings report. share forecast of $2.70 to $2.90. The business will continue to benefit from growth in e-commerce, demand for outsourcing and growth in areas such as reverse logistics.

While other e-commerce stocks are facing headwinds, GXO looks well positioned and should win regardless of which businesses do well at the retail level.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Jeremy Bowman has held positions at Amazon, Etsy, GXO Logistics, Inc. and XPO Logistics. The Motley Fool holds positions and recommends Amazon, Apple and Etsy. The Motley Fool recommends GXO Logistics, Inc., Nestlé, Wayfair, XPO Logistics, and eBay and recommends the following options: $120 long calls in March 2023 on Apple and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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