IBUY: After The Downside, An Upside Becomes Realistic

Summary

• IBUY aims to obtain at least 70% revenues from online sales.
• After an upbeat performance in 2020 and at the start of the year, investors' enthusiasm for the ETF has cooled off.
• In order to assess prospects for 2021 and beyond, I consider industry reports, especially those pertaining to online retail, as well as inflation concerns.
• There is potential for a 13.7% upside by the end of this year.
• In the worst case scenario that travel should be severely impacted by COVID variants, IBUY can rely on its Online Marketplace assets.

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The Amplify Online Retail ETF (NYSEARCA:IBUY) tracks the EQM Online Retail Index, which aims to obtain 70% or more of revenues from online sales. Additionally, the fund comprises payment processors like PayPal (PYPL), business freelancing platforms like Upwork (UPWK) and over-the-top content platform Netflix (NFLX).

Source: amplifyets.com

Now, after having delivered a 150% performance throughout the pandemic, from March to December 2020, expectations were for IBUY to outperform in 2021. This has been the case, but only for a brief period when it flirted with the $140 level at the start of February. Since then, its share price has been on a net downtrend and is currently around the same as it was at the beginning of this year.

The aim of this thesis is to analyze the prospects going forward, but for this purpose, I start by diving in the past.

Historical growth

First, looking into the rear-mirror, a number of factors buoyed markets for the greater part of 2020, primarily the massive liquidity injection from the Federal Reserve and other central banks worldwide, as well as fiscal stimulus measures aimed at mitigating the economic fallout from the pandemic. The markets' upward momentum carried through the fourth quarter amid mitigated signs of improvement in the U.S. economy, as well as coronavirus vaccine prospects as from November. IBUY also received support from the strong performance of technology stocks as many of its holdings rely on IT platforms, telecommunications infrastructure and artificial intelligence tools to deliver services.

Hence, notable contributors for Q4 were Stitch Fix (SFIX), which uses algorithms and data science to personalize clothing items, delivering an 116.4% upside. It was 405% for international online marketplace firm Jumia Technologies AG (JMIA). These outperformed behemoth Amazon (AMZN), by far.

Data by YCharts

In 2020, IBUY also benefited from the continued increase in U.S. e-commerce sales, as the pandemic hit the ability of brick-and-mortar businesses to deliver, with online sales reaching a level not previously expected until 2022.

In this respect, forecast for U.S. eCommerce sales were to reach $794.50 billion in 2020, up 32.4% year-over-year, as consumers avoided stores and opted for online shopping.

Growth for 2021

Now, for this year, according Insider Intelligence, there should be continued momentum for online services encouraged by consumer enthusiasm, but U.S. retail eCommerce sales will only grow 13.7%, reaching $908.73 billion. This slowdown is partially due to the rebound of brick-and-mortar stores and also due to so much growth being pulled forward to 2020.

Expanding globally, mobile commerce growth rate is forecasted to be 18.3%, which is down from 32.0% in 2020. Now, mobile commerce is the use of smartphones and tablets to conduct commercial transactions, including online sales, online banking and paying bills.

All this growth means that IBUY, with 52% of assets devoted to retail and 39% of Online Marketplace exposure, should benefit from its holdings growing their businesses further, but, this should be at a lower rate than in 2020.

Source: amplifyets.com

I have moderated growth for 2021 based on forecast by Insider Intelligence, but this is also supported by inflation concerns and further market surveys.

In this context, the Federal Reserve's Chairman was consistent with his very gradual approach to policy changes at the annual Jackson Hole forum. This implies a longer period of loose liquidity (cheap money), normally synonymous of ever higher asset prices. His approach was cheered by the financial markets on Friday as stocks rallied to a new record.

On the other hand, economists are questioning whether the speech will end up being out of phase with actual economic developments as they unfold over the remainder of this year and beyond. More specifically, they are concerned about inflation risk, which encapsulates factors such as wage rise.

Now, rising inflation means higher prices and other factors to consider are spending patterns during 2021 being different compared to last year, with consumers shifting spending towards restaurants and fuel for their cars, while others are staying home as the Delta variant has surged in parts of the country. In addition to inflation, prices, both for online and offline businesses are also being impacted by supply chain issues.

Pursuing further, according to a survey by Adobe (ADBE), after years of falling prices, Americans' online purchasing power is gradually beginning to decline. According to the data, online prices rose 2.3% in June from a year earlier, and 0.6 percent from May.

Still, this rise in prices is lower than the 5.4% year-over-year surge noted by the Labor Department’s consumer price index, which largely ignores online prices. Therefore, online prices have been rising, but at a slower pace than for their brick and mortar counterparts.

Valuations and key takeaways

Summing up, data from various reports do show that there will be growth in 2021, despite rising prices. Assuming online sales growing at 13.7% (as per Insider Intelligence I mentioned earlier), an end-of-year estimate of $127-128 is obtained based on a $113 share price, which is the price at the beginning of 2021.

Now, IBUY's 8% exposure to travel is a concern in view of the Delta variant, with the CEO of online-travel agency Booking Holdings being worried after witnessing a slight pullback of booking trends in July compared with June. On the other hand, travel and leisure executives described the most recent disruption as modest and likely short-term, implying no material changes to their reopening plans. However, that was at the beginning of August and more recently, the proportion American travelers who are concerned about personally contracting COVID has increased by half since May, from 21.4% to 40.0%. Interestingly, the greatest opposition to travel is found among the un-vaccinated.

Therefore, uncertainties should fuel volatility going forward, but, any sustained downturn in travel should be more than offset by IBUY's 39% of assets dedicated to Online Marketplace, in contrast to the traditional eCommerce whereby retailers setup their own portals and sell directly to customers.

In this respect, 47% of eCommerce sales were made through online marketplaces in 2020, amounting to nearly two trillion dollars. This is forecast to grow dramatically over the next 5 years, as more companies adopt marketplaces like Amazon and eBay (EBAY) as platforms to promote online sales.

Looking across the ETF space, the Amplify fund has outperformed the ProShares Online Retail ETF (ONLN), which also provides exposure to global equities and caps non-US assets at 25%, but IBUY's upbeat performance seems to be linked to the fact that it tracks a modified equal-weighted Index. In contrast, it is a modified market capitalization weighted approach for ONLN, with Amazon constituting 24% of total assets.

Moreover, IBUY exhibits more volatility, with its 24M Beta of 0.97 being nearer to one and carries a higher expense ratio. Still, it comes with more holdings and with relatively less assets forming part of the top ten, signifying lower concentration risks.

Source: Seeking Alpha

Finally, a $127-128 target is realistic after half a year of downside equaling 11.23%, and, in the worst case scenario that travel is severely impacted by COVID variants, IBUY can rely on its sizeable exposure to Online Marketplace to drive upside well into 2022.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of IBUY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.