Investors hunt for next Alibaba as pandemic drives online shopping

Internet companies little-known outside their home markets are proving a favourite with stock pickers as self-isolating shoppers drive a surge in demand.

E-commerce stocks like Pinduoduo Inc., B2W Cia. Digital, Cafe24 Corp and Jumia Technologies AG continue to rise and are on the verge of erasing their losses from the first-quarter slump, even as the broader equity rebound in developing markets stalls. The rally isn’t being led by the biggest name of them all — Alibaba Group Holding Ltd. — but companies one-tenth its size.

It’s no surprise Internet companies are beating other emerging-market sectors given the growing preference for online buying amid high-street closures. But the fact that investors are leaning toward smaller companies within the group suggests they expect the online shift to accelerate even after shops reopen. Much like the dot-com era, this is a bet on growth and market-share potential rather than current standing.

“The name of the game when it comes to e-commerce is not profitability or free cash flow, but revenue growth and market-share increases,” said Fabiana Fedeli, the Rotterdam-based global head of fundamental equities at the Robeco Group. “It makes sense for investors to focus on the companies with most rapid growth potential.”

It’s a varied roster. China’s Pinduoduo offers group deals much like Groupon Inc. Brazilian retailier B2W, which reported a 53% increase in first-quarter earnings, is betting on digital-sales growth well beyond the pandemic. Jumia, while based in Berlin, derives 99% of its revenue from Africa. All these stocks have jumped more than 75% since March 18.

Alibaba, by contrast, has posted an 11% gain during the period and is still 13% down from this year’s peak.

The market chaos caused by the coronavirus has broken traditional valuation methods, according to Fedeli, who was an analyst at ING Barings during the dot-com crash in 2000. Now, the focus is on growth to discover the next Alibaba in a “winner-takes-all” market, she said.

Investors in exchange-traded funds, who have been pulling money from developing-nation equities for 12 weeks, are also embracing Internet stocks. The Emerging Markets Internet and Ecommerce ETF received $13.3 million on Wednesday, the biggest daily flows since 2018. The digital sector is second only to dollar bonds in the strength of inflows.

Still, Fedeli points to two threats.

“Some of these companies will have a short shelf life,” while those seen as potential survivors will wind up with “very high” valuations, she said.

As economies reopen and other industries start to perform, the high-flying e-commerce stocks may well look too dear, she said.

© 2020 Bloomberg