As the economy continues to reopen and consumers shift their behavior, e-commerce giants are seeing a slowdown in consumer interest, and companies are issuing weak guidance in response. Customers are increasingly shopping in person, or slowing down their spending habits in response to inflation. Even industry giant Amazon is predicting a third-straight quarter of single digit growth — something once unheard of for the company. Where does the e-commerce industry go from here? John Freeman, Equity Analyst at CFRA Research, joins Closing Bell to discuss the broader e-commerce cooldown, why companies like Etsy and eBay issued lower guidance, why eBay could still have growth potential, and more. 

Closing Bell

As Etsy and eBay Issue Weak Guidance, Is E-Commerce Cooling Down?

shares of both companies hitting new 52 week lows today. And what are the future of e commerce look like as consumers increasingly shop in person or simply cut back spending altogether amid high inflation. Well, joining me now is john Freeman equity analyst at CFR Research, that's a global independent investment research provider, john thanks for coming on the show. How significant is it that both of these companies get issue we guide into head. Yeah, it certainly seems like a trend. Um, yeah, it was, it was pretty bad. I mean the Ebay guidance went from, you know, some decent growth to what is now going to be a pretty significant year over year contraction. Now with Ebay you've got some other moving parts, they divested some businesses things like that. But no, it is pretty significant and I want to give pause right now because you just don't see that kind of, I mean obviously it's the macroeconomic headwinds that are, you know, that, that, that is driving this and and certainly a lot of that is real. But um, it also begs the question like, you know, I mean the whole e commerce trend just isn't going to go away. So perhaps this is a, you know, sort of a shorter term undulation um, that speaks more about overall consumer behavior than e commerce specifically, Is there any bright spot on the horizon, john, is there a turning point that could more positively impact these companies? I don't see what, well, yeah, morbidly. Uh, you know, if Covid comes, you know, if another variant comes back then everyone locks down again and then you have to rely on e commerce. Um, I mean, I don't think anybody wants to see that. I don't think that's really a, You know, a net positive for a net positive for e commerce, but I would say maybe it's more of a protection I guess right as it was in 2020. But I don't know, it's, it's, it's, it's kind of tough to say, especially with regard to what I can't kind of wrap my head around. We we obviously see uh you know, inflation on the horizon, we see the Fed obviously, you know is getting more hawkish but what I can't figure out is, but the, but the labor market is so tight. Right. I don't know that I'm not the, you know, I can, I come at this from the software perspective, right? Not the economist perspective, but if I put on my, you know, amateur economist hat that doesn't seem to square. So it just kind of leaves questions in my, in my mind, you know, and it just sort of things to pay attention to about what's really happening. So despite Ebay's weak guidance, I know you're still bullish on the company. Why is that? Well, uh my note just came out actually I have downgraded it to a hold, I'm very bullish on the company. I just see this e commerce is right now that I mean the guidance really surprised me on the downside. So you know, and I kind of want to get a better handle about what's really going on under the hood here, both from a macroeconomic perspective. Um, and, and specifically for e commerce now, the area of Refuge that you know, I am sort of recommending is the area of Refuge is enterprise software where salesforce Microsoft all these guys, these guys are the solution to the problem of, you know, of, of economic financial economic pressure on all, you know, on all companies on all sort of enterprise class organizations. So they're usually the solution so they typically actually benefit in the, in the tailwind of of a, you know, kind of a crisis or, or a severe economic downturn, like what we're likely seeing here. You know, I think after a lot of investors john that just simply watched amazon's stock crush at quarter after quarter and major growth mode to see the stock struggling of late to see the e commerce business struggling of late has been certainly a new chapter for investors after a long stretch of growth there. So the company actually worried last week that it could see its third straight quarter of single digit revenue growth. Is this an amazon story or a broader e commerce story? Well remember, I mean it may be an e commerce story where amazon has, you know, you see over the last couple of years, you know, back and forth between share taken and using advertising as a lever and these kinds of things. But remember amazon's got the cloud business and clouded business is just, is enterprise software and it is still growing, you know, uh very healthy double digits uh and is also the most profitable part of the business. I think it's some, you know, in some quarters it represents three quarters of amazon's profits and there's the cloud businesses, you know, seeing nothing but continued growth as enterprises, all enterprise across the world are moving their applications, you know, from their own premise to the cloud and you know, we're only about 40% if you look at it from a revenue perspective, we're only about 40% done with that migration. So that trend has a lot of legs and so, you know, it's tough to parse out. Obviously amazon, you know, breaks out their revenue, but they've got that, you know, as a back as a pretty significant backstop, uh you know, regardless of what their e commerce business does. Well, another major factor here of course is inflation, 8.5% gains in prices in the month of March from the same time, a year ago. The quickest clip that we've seen of inflation in 40 years. So certainly that could be starting to curtail some of consumer spending as well, especially when it comes to maybe more luxury or discretionary items. The Feds path forward john when it comes to raising rates and the inflationary output, um how does that impact this sector? Well, you know, normally I don't think about Fed rates, right? As a, as a tech analyst, you know, it's kind of on the side here and obviously, you know, for higher multiple stocks, it's, you know, it's gonna, they're gonna get hit worse. But from a fundamental perspective, like I said in these economic downturns, the enter the enterprise software companies benefit substantially. The e commerce guys also benefit, but it's more on a relative basis, right? Compared to, you know, uh, those companies, you know, obviously the companies that are, that are, you know, consumer oriented, retail oriented that are, that don't have large e commerce, you know, exposures, are they better off now? I don't think so. Right. So I think they're going to continue to lose share. It's just sort of a relative, you know, relative basis and, and how you value them any deals to be had here in this space, any value plays, john, when you look at the broader e commerce sector, the broader shopping sector as a whole. Right? You know, I think Ebay has a, is a very attractive property, um, and, and a very attractive business. It's going through and, you know, I own is, he's the new Ceo, he's relatively new Ceo, he's been at it for about two years, he's made some great strides in turning this company around, no doubt about it and it, and it's been reflected in the stock price over the last, You know, two or three years, but, you know, if this is, and, and, you know, certainly she's got some more work to do. But if you look at Ebay as an attractive target, wow, that that could be very interesting. It's just then it begs the question like, well, who would buy it if it's big, big tech, right? It's probably gonna get blocked from a regulatory perspective. So, I think we're in a very different sort of m and a perspective right now, when the, by the most likely buyers are probably the ones who are going to, you know, face regulatory scrutiny, uh, you know, my Microsoft amazon google facebook, right? All those guys right there, gonna face regulatory scrutiny if they're going to start to look at some of the attractive valuations as an M and A opportunity. Alright, JOHn Friedman, we got to leave it there, JOHN is an equity analyst at CFR Research, jOHN, thank you.