Shopping for the Next Amazon?

RJ Hottovy: Over the past couple of years Morningstar has taken a close look at the North American e-commerce space, and in particular, what makes Amazon so special and gives it a wide economic moat.

More recently, however, we've also expanded the scope of our research to take a look at a number of other e-commerce markets across the globe, including China, Latin America, Europe, India, and Australia, to really see if there was a number of similarities between the markets and whether or not we could see similar instances of companies replicating Amazon's success. Using our analyst teams in each one of these regions we've come up with four global themes that really, we think, marks the growth of e-commerce in each region.

The first theme that we identified is that e-commerce tends to evolve in a similar fashion across geographies. It starts with a consumer-to-consumer marketplace before migrating to a business-to-consumer marketplace once the logistics and payments infrastructure has reached a point of critical mass. At that point, we typically see a large business-to-consumer marketplace, like Amazon, reach more than 10% of the local population and that becomes the point where that marketplace becomes too large for sellers or advertisers to ignore, and really becomes a critical outlet for both consumers and sellers alike.

The second theme that we identified is that recessions and economic downturns can often be a springboard for e-commerce adoption. We looked back at the growth of Amazon in 2008 and 2009 during the last Great Recession and found that that was a pivotal point in the growth of its user base where consumers came to recognize the logistics, the selection, and the pricing that the company offered. We think that a similar situation is setting up in both China and Latin America. We find that consumers gravitate towards e-commerce players during these periods of economic hardship as they look for greater value and convenience, and we think that that's what e-commerce players can offer.

The third theme that we identified is that once a company has reached 10% of the local population as its active user base, it can open up the doors to a number of ways to monetize that business. For example, Amazon with Amazon Prime memberships, and we think this is something that could be replicated by players like Alibaba and MercadoLibre. But there are other things such as online/offline services such as car rental services or restaurant takeout deliveries, cross-border trade, third-party logistics, it does become an interesting way to monetize the business one you effectively locked in a large percentage of the population as an active user.

The fourth and final theme that we identified is that the one category that traditional e-commerce players have had difficulty breaking into is online travel. Here it's a different seller base than most e-commerce companies are used to dealing with. Instead of dealing with large merchants and retailers what they are dealing with is hotel chains and other travel-related businesses. As a result, they haven't had the same kind of network effect built in this category. We've seen players like Priceline, Expedia, and Ctrip instead fill this void and aggregate their network among the hotels chains, and as a result, it's made it very difficult for e-commerce players to really succeed in this category. For this reason, we think that some of the opportunities for players like Priceline and Expedia had been overlooked just because of the difficulties that traditional e-commerce players have had penetrating this market.

We think these four themes are particularly relevant in today's market, as we've seen a pullback in a number of the e-commerce names since the beginning of the year with a number of the names like Amazon, Alibaba, MercadoLibre, and Priceline trading at attractive valuations relative to our fair values.