Pandemic dividend fades into a distant memory for ecommerce

Do you remember the tech industry’s pandemic dividend?

The idea that tech companies would get a permanent lift from the enforced use of their services during lockdown was a big factor in the final leg of the tech stock boom. In some corners of the industry, however, hopes for a lasting Covid-19 effect have faded.

That is nowhere more true than in ecommerce. After the latest hit to tech stocks over the past week, Amazon’s share price has finally fallen back to its pre-pandemic level. Exchange traded funds that track the ecommerce sector have done even worse: the Amplify Online Retail ETF is 20 per cent below where it stood when Covid-19 hit.

What happened to the idea that the new online buying habits that people were forced to learn in the pandemic would lead to a permanent change in consumer behaviour? And for that matter, what about the belief that changes to things such as working life and home entertainment would permanently boost the fortunes of some tech companies? Shares in video conferencing service Zoom are also back to where they were at the beginning of the pandemic, after a wild ride that saw them rise more than fivefold. Shopify, which provided a platform for retailers that needed to turn online for sales in an emergency, is a third lower than before the crisis.

Across the tech industry, companies that looked forward to a permanent boost in digital demand are being forced to consider whether the pandemic really lifted their sales to a plateau from which growth will continue at the previous rates. There is even the risk that the crisis pulled forward some sales that would have happened in future years, leaving an even bigger hangover — something that may have happened in some areas of IT.

Online shoppers have been more than happy to get back to the store: if experiencing the convenience of buying with the click of a mouse has bred an army of ecommerce converts, it is hard to see in the aggregate data. In the US, ecommerce jumped from 12 to 16 per cent of retail sales in 2020. By the first quarter of this year, though, it had fallen back to 14 per cent — pretty much in line with the longer-term growth trend for the sector before Covid-19.

As the one-off lift to online shopping fades, the year-on-year sales comparisons are denting this year’s growth figures. Wall Street is expecting Amazon’s ecommerce growth to fall below 10 per cent — a far cry from the 39 per cent growth of 2020.

There may still be some small, enduring pandemic effect hidden in these numbers. Analysts at Jefferies point out that Amazon is expected to end up with a three-year compound growth rate of about 20 per cent for 2020-2022, up from the 18 per cent growth it reported the year before the crisis hit, suggesting a minimal uplift.

But as financial and economic conditions turn, other factors are quickly assuming much more significance, making the pandemic bounce a distant memory in markets such as ecommerce.

One is a decline in the valuation multiples Wall Street is prepared to put on tech growth, more than wiping out any small uptick in underlying digital demand there may have been. Amazon is now trading at roughly 2.1 times revenue, down from 2.8 times revenue in early 2020.

How far multiples will retreat is still an open question. After a 10-year bull run, tech stocks were riding high even before the pandemic hit, so there’s no reason why falling back to pre-pandemic levels should represent any kind of floor.

The other factor is the economy. The convulsions in global supply chains have held back sales. Rising labour and fuel costs are adding to the expense of fulfilling online orders. The sudden, sharp change in the interest rate outlook has left a question over the continued strength of consumer spending.

The result, for a company like Amazon, is pressure on both sales growth and profit margins. Compounding the problem, the ecommerce giant miss-timed its latest investment binge. Wall Street has long been accustomed to surges in spending, as Amazon adds the warehouse and distribution capacity to handle its next leg of growth. But last year’s $61bn of capital expenditure — up more than 50 per cent from the year before — turned out to be a big leap at an inopportune time.

The net result is an expected halving in Amazon’s adjusted operating profit margin, from last year’s 9.3 per cent. Things should improve as the company grows into its higher cost base and year-on-year sales comparisons become less challenging. But by then, the pandemic boom will be a distant memory.

richard.waters@ft.com