Good news for Amazon, Alphabet: Despite reopening, analyst sees e-commerce growing fast

Published Tue, Apr 26 20223:49 PM EDTUpdated Tue, Apr 26 20224:23 PM EDT

A positive report on the future of e-commerce bodes well for Club holdings Amazon and Alphabet, both of which report quarterly earnings this week. Most notable in the analyst note from Cowen was the estimate that online sales are on track to grow 11% annually over the next five years to a total of $1.6 trillion. While the demand sparked by the Covid-19 pandemic has lessened as brick-and-mortar stores reopened, this "give back" period appears to be behind us. Cowen bases this upbeat view on a proprietary model. If Cowen is right, online sales will account for 20% of retail sales in 2027 in the U.S., up from today's 15% penetration rate. What companies stand to benefit most? Excluding media, Amazon (AMZN) is believed to account for 39% of the U.S. e-commerce market, up from 34% in 2019 and expected to hit 40% by 2027. Keep in mind: That's 40% of a much bigger overall market. The analysts at Cowen called out the company's significant delivery infrastructure investments that should lead to faster delivery speeds and result in greater adoption. On profitability it is worth noting that we may be entering the later phase of the infrastructure investments. We will be looking for commentary on this during the company's upcoming earnings call on Thursday, after the closing bell. Alphabet (GOOGL) was also called out as a primary beneficiary of the shift to online shopping, with the analysts noting that Google Search is a "major driver for the conversion of online commerce, and YouTube is an emerging platform for social/live commerce." Moreover, while the shift to digital advertising that comes with the increased adoption of online shopping plays right into Alphabet's hands, the company also stands to benefit from the rebound in physical retail — and especially the reopening of the global economy and the return of travel. The highest penetration for online retail is currently in media, toys, electronics and appliances, as well as office equipment and supplies. But Cowen predicts future growth will be largely driven by food, beverages, and consumables (think personal care, pantry items) — which combined are expected to account for a third of the e-commerce spending increase this year. Their share of incremental spending is then expected to increase between 2023 and 2027. While not mentioned in this analyst report, that's also good news for Club name Walmart (WMT), which has made significant investments into its e-commerce infrastructure and is the largest grocer in the U.S. by revenue. The analysts noted that the gains in online grocery shopping have sustained, despite an increased willingness by consumers to go to physical locations. Roughly 38.5% of respondents to their 2,500 person proprietary monthly survey used an online grocery services "in the past month" (during the first quarter of 2022). That was up from 19% in the fourth quarter of 2019. Inflation remains the greatest headwind More than half of respondents indicated that they either have or intend to cut spending in certain categories. This is another potential data point that speaks to the strength in shares of WMT, thanks to the company's exposure to groceries (an obvious spending category that is recession-resilient) and intense focus on lower prices. Moreover, the impact of higher prices appear to be having a larger impact on lower-income households than higher-income ones, something Federal Reserve Governor Lael Brainard spoke about recently. She said lower-income families can't "trade down" to cheaper prices because they're already buying generics and store brands. More than a third of respondents to Cowen's survey said higher gas prices were a significant source of pressure on discretionary income. And while household savings reached an all-time high in 2020, we are starting to see the rate come down as the economy opens and picks up and inflationary pressures are being passed along to the consumer. Consumers aren't the only ones feeling the pressure from inflation. Cowen also pointed out that labor shortages are as a near-term pain point due to the rising wages required to attract workers. Bottom line Inflation is a major headwind weighing on stocks due to its impact on valuations and the potential drag on demand. We will learn more about just how much of a drag this week as companies report earnings. Still, the secular adoption of online shopping that was at play prior to the pandemic appears to be going strong. Though this may be of little comfort today, these regular updates help us maintain longer-term convictions and enhance our ability to keep a level head during volatile periods, something that is crucial when attempting to identify potential targets for new capital as lower prices are thrown at us. (Jim Cramer's Charitable Trust is long AMZ, GOOGL, WMT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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An Amazon truck is seen entering the LDJ5 Amazon Sort Center on April 25, 2022 in New York City.

Michael M. Santiago | Getty Images

A positive report on the future of e-commerce bodes well for Club holdings Amazon and Alphabet, both of which report quarterly earnings this week.

Most notable in the analyst note from Cowen was the estimate that online sales are on track to grow 11% annually over the next five years to a total of $1.6 trillion. While the demand sparked by the Covid-19 pandemic has lessened as brick-and-mortar stores reopened, this "give back" period appears to be behind us. Cowen bases this upbeat view on a proprietary model.