The Gartner Hype Cycle in real life: e-commerce stocks in emerging markets

The Gartner Hype Cycle in real life: e-commerce stocks in emerging markets
17 December 2021

Had you held onto Amazon stock when the company went public in 1997, your return on investment would have exceeded 200,000% by now. Naturally, as investors, we are looking for similar success stories. Do they exist?

After the pandemic broke out, the stocks of so-called "Amazon equivalents" in emerging markets have gone through the roof. These are companies that are building the same type of business as Amazon, but in regions where Amazon has a weak presence (or none at all).

The combination of less mature markets, higher growth rates, and higher profit margins led many of these shares to the "Peak of Inflated Expectations" earlier this year. However, over the past months, most of these stocks have come crashing down to earth again. They have now entered the "Trough of Disillusionment". It's that part of the Gartner Hype Cycle that you should be most interested in (see my latest Weekly Dispatch for an explanation of the term). Amazon stock also once went through such a difficult period, and it was then that you should have picked up shares.

Which stocks represent those emerging market Amazon equivalents, do they have much further to fall, and when will be a good time to start picking them up?

Today's Weekly Dispatch will give you a quick overview of a sector that is worth keeping on your watch list.

The boom and bust of Amazon equivalents

There is a whole swathe of listed companies that are Amazon equivalents in emerging markets. Defining what exactly makes an Amazon equivalent is an imprecise science, e.g. some companies originated in a different field but are now building e-commerce as one of their lines of business. However, the following names are generally counted as part of the sector:

Name Country/Region ISIN Market cap in USD
MercadoLibre Latin America US58733R1023 61bn
Ozon Holding Russia US69269L1044 7bn
Allegro Poland LU2237380790 9bn
Alibaba China US01609W1027 331bn
JD.com China US47215P1066 121bn
Sea Limited (Shopee) Asia / South America / India / Europe US81141R1005 128bn
Jumia Technology Africa US48138M1053 1.5bn
Hepsiburada Turkey US23292B1044 0.7bn

In recent times, these stocks had all posted massive gains:

Name Period Gain
MercadoLibre Jan '17 – Jan '21 +1,000%
Ozon Holding Dec '20 – Feb '21 +120%*
Allegro Sep '20 – Oct '20 +120%**
Alibaba Jan '17 – June '20 +220%
JD.com Nov '18 – Feb '21 +423%
Sea Limited (Shopee) Jan '19 – Nov '21 +2,850%
Jumia Technology Feb' 20 – Feb '21 +2,060%
Hepsiburada Jul '21 – Jul '21 +15%***

* IPO in Dec '20
** IPO in Sep '20
*** IPO in Jul '21 at sky-high valuation, founder cashing out

But they have all come down rather dramatically as of late:

Name Peak Decrease
MercadoLibre Jul '21 -38%
Ozon Holding Feb '21 -53%
Allegro Oct '20 -63%
Alibaba Oct '20 -63%
JD.com Feb '21 -18%
Sea Limited (Shopee) Oct '21 -38%
Jumia Technology Feb '21 -85%
Hepsiburada Sep '21 -85%

For each of them, there'll be a somewhat different set of reasons why the stock price has come off its high. Key among them is usually:

  • Investors realising that building such companies in emerging markets takes longer and is more difficult and expensive.
  • These companies invading each other's turf, e.g. Sea Limited's Shopee brand has entered MercadoLibre's South American markets, and Allegro has struggled with Amazon pushing into Poland.
  • A general sell-off among tech stocks (excluding Nasdaq's Big 5), coupled with worries that e-commerce growth rates could slow down – if only temporarily – following an end to the pandemic lockdowns.

Whatever the precise reasons may be, most of the Amazon equivalents are now going through a Trough of Disillusionment.

Do these stocks have much further to fall? There are some encouraging signs that we are approaching the bottom:

  • Poland's Allegro and Russia's Ozon Holding are now trading well below the price that investors eagerly paid when they IPOed.
  • Turkey's Hepsiburada and Africa's Jumia Technology have been absolutely crushed – down 85%. These are still two massive markets where e-commerce will grow massively.
  • China's Alibaba is down two-thirds, but it's likely to remain one of the strongest companies in the sector.

It's nigh on impossible to accurately call the bottom, but the level of losses as well as more investors throwing in the towel are encouraging.

Will they turn around?

Just because some stocks have fallen rather dramatically doesn't mean they'll be guaranteed to turn around again.

However, many of the reasons that made these stocks gain so much value in the first place are just as valid today:

  • Emerging markets are underpenetrated as far as e-commerce is concerned. E.g., e-commerce in South America makes up just 5% of the retail industry, compared to 20% in the US. Many of these markets have young demographics, and consumers that have pent-up demand which they could satisfy through purchases on the web. These markets still have a lot of growth potential.
  • Affordable smartphones, increasing bandwidth, and the rise of fintech will continue to push consumers in emerging markets towards buying products and services off the web.
  • Some markets will remain outside the reach of Amazon, e.g. it's difficult to see Amazon eat into Ozon Holding's market position in Russia.

The question is, which one of these fallen stars has the best risk/reward ratio for investors? And when should you start picking up stock?

I have spent a fair bit of time on this question recently, and found one stock that I particularly like. It's currently going through the Trough of Disillusionment, but it will leave this trough eventually (remember Amazon?). There are specific reasons why I believe now is a good time to start picking up the stock.

Which stock am I talking about, you might ask?

Find out in my upcoming research report! It'll be out before Christmas, and it'll feature an in-depth analysis of the stock that I rate as the closest there is to Amazon in emerging markets.

Like all of my best investment ideas, my latest discovery will be available exclusively for Undervalued-Shares.com Members. If you haven't signed up yet, it's very easy to do - and from just USD 49/year, it's a bargain, too!

Consider it an early Christmas present for yourself 🙂

How (and why) you should exploit European equity markets

“Boring” probably springs to mind when you think of European stock markets. But are they really?

There are many aspects that make the European market so unique for investors. Join me and Mikkel Thorup (Expat Money Show) as we embark on a virtual tour around Europe, touching on opportunities in countries such as Germany, France and Switzerland.

How (and why) you should exploit European equity markets

“Boring” probably springs to mind when you think of European stock markets. But are they really?

There are many aspects that make the European market so unique for investors. Join me and Mikkel Thorup (Expat Money Show) as we embark on a virtual tour around Europe, touching on opportunities in countries such as Germany, France and Switzerland.

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