2021 hasn’t been a good year for some e-commerce stocks. Amazon is the worst-performing FAANG stock of the year and it's barely positive for the year. However, ContextLogic (WISH) and Alibaba (BABA) stand out in terms of underperformance. Which of these is a better beaten-down e-commerce stock to buy in October 2021?
So far, BABA stock is down 36 percent in 2021 and has hit another 52-week low on Oct. 4. WISH has fared even worse and is down 72 percent YTD. Like BABA, WISH has also made a 52-week low on Oct. 4.
Why have e-commerce stocks been falling in 2021?
In general, e-commerce stocks have looked weak in 2021. However, Shopify and eBay are outperforming the markets. Apart from BABA, WISH, and AMZN, Coupang is another notable underperformer. The stock trades below the IPO price and made a 52-week low on Oct. 4.
The macro environment has been negative for e-commerce companies, at least in the short term. The reopening of the economy has meant that more people are visiting brick-and-mortar retail stores, which has led to slowing growth for e-commerce companies. Amazon missed its top-line estimates in the second quarter. It was the first time in three years that the company’s sales missed estimates.
In a nutshell, e-commerce companies are facing tougher YoY comps since they're coming down from the COVID-19 pandemic peaks. The slowing growth, combined with high valuations in some cases, took a toll on e-commerce stocks.
Why WISH stock is falling
Meanwhile, the woes for WISH are much more nuanced than the broader weakness in growth and e-commerce stocks. The company’s earnings haven't pleased markets. Its sales fell in the second quarter even though the losses continued to swell. The resignation of the company's CFO, months after the IPO and at a time when the stock has been plummeting, also raised fingers.
Why BABA stock is falling
BABA’s earnings have been pretty solid. However, it has been a victim of the crackdown in China. The stock has continued to fall and has been making new lows amid uncertainty about the regulatory changes in China. The Evergrande crisis and the resultant fears about the Chinese economy haven't helped BABA stock either.
BABA stock forecast
Last week, Raymond James withdrew its strong buy rating on BABA stock and lowered the target price from $300 to $240. While Wall Street analysts have generally been on the sidelines during China’s tech crackdown, many of them have been turning bearish on BABA stock.
KeyCorp also lowered its target price from $250 to $200, while Citigroup lowered its from $300 to $240. Bank of America lowered BABA’s target price from $285 to $254. Here, it's worth noting that while brokerages have slashed BABA’s target price, their target price implies a massive upside.
According to data from TipRanks, BABA has an average target price of $247.67, which is a premium of almost 72 percent over the current prices.
BABA or WISH: Which is a better e-commerce stock to buy?
BABA and WISH are beaten-down e-commerce stocks and are trading near historically low valuations. Meanwhile, the stocks have fallen for entirely different reasons. If you think that China’s tech crackdown is over, BABA looks like a compelling buy. It trades at 12.4x its fiscal year 2023 (that would end in March 2023) earnings, which looks tempting.
WISH is currently making losses but trades at less than 1x its projected sales for the next 12 months. While BABA stock is a play on the Chinese e-commerce market, WISH is a play on social e-commerce and the company’s turnaround strategy where it's focusing on retaining existing customers rather than aggressive top-line growth.
At these prices, both of the stocks look attractive. It would be prudent to take small exposures to both the beaten-down e-commerce stocks and wait for the market sentiments to improve. While there's always a chance that they might fall more, which they have been doing for the last few months, the risk-reward dynamics for long-term investors look favorable at these prices.