Last week the stock market celebrated the five-year anniversary of the S&P 500 Index, since hitting its lowest point during the Great Recession. Over the past five years, the recovering bull market has rewarded a number of blue chip E-Commerce companies with soaring stock prices. However, there is also much skepticism surrounding the future of the market, leaving investors worried. In this article I will identify and explain the economic trends that have led to the increased stock prices of companies like Priceline (PCLN) and Amazon (AMZN), while also examining their potential for future growth.
To begin, we must first understand why the S&P 500 Index bottomed out on March 9, 2009. The stock market crash was a late part of the financial crisis that began in 2007. There are a number of factors that contributed to the escalation of this crisis, but most economists agree that the housing market, which peaked in 2006, was the major catalyst to the recession. The housing market bubble, a result of overvaluations of properties, triggered a fall in housing prices and widespread defaults on mortgages. This led to devaluations in securities tied to these bad mortgages, which eventually resulted in massive losses for America’s banking system (and the subsequent bankruptcies of Bear Stearns and Lehman Brothers).
Unprecedented losses in the financial system, in addition to the collapse of 465 banks, damaged investor confidence in the whole stock market and triggered sector-wide declines in stock prices. Economists disagree upon whether or not the financial crisis has come to end; however, they cannot argue with the fact that the S&P 500 Index closed at 676.53 in March 2009, and has recently surpassed 1,870 (a gain of over 170%).
The E-Commerce sector has the biggest winner of this 6-year bull market in Priceline, whose shares have surged over 1,600%. Its competitor, Expedia (EXPE), has also followed close behind, with its stock price gaining over 1,100%. The two companies offer online bookings for flights, hotels, and rental cars, as well as discounted vacation packages. Priceline’s gross bookings alone yielded $9.1 billion in Q4 of 2013, thus prompting the question, “why have online travel companies fared so well over the last five years?” Just as the S&P 500 Index serves as an economic indicator, so to does travel. The travel industry has marginally outpaced global economic growth over the last five years (2009 was a bad year for travel because of the H1N1 virus outbreak). International travel increased by 4% in 2013 and furthermore, according to the World Travel and Tourism council, this growth is expected to continue. The global economic recovery has led to an increase in universal middle class incomes, especially in developing nations. As long as the recovery continues, the number of international travelers will grow as well. The success of the travel industry's recovery, along with the prospect of future growth, has given investors confidence in online travel companies. To further support this newfound confidence, Priceline and Expedia routinely beat earnings expectations and have made successful investments in advertising and mobile markets (i.e. the Priceline Negotiator).
Aside from online travel companies, online retailers are also soaring. Amazon is up over 500% and eBay, Inc. (EBAY) is up over 450%. These companies have been able to capitalize off the struggles of physical retailers. By charging lower prices for goods, and also offering customers discounted and expedited shipping options, online retailers have kept consumers at home. In addition, both Amazon and eBay offer secondary services that have proven to be significant revenue sources: Amazon Prime and PayPal. Amazon Prime offers free two-day shipping and unlimited streaming of 40,000 movies and television shows. Amazon still has not released the number of Prime subscribers they have, however, it is estimated that there are at least 10 million. Research has also unveiled that Prime subscribers annually spend nearly three times more than nonmembers. Although Amazon recently increased the price of annual membership from $79 to $99, Morningstar estimates that there could be 25 million subscribers by 2017. Thus, Amazon is poised to continue its remarkable growth.
PayPal, on the other hand, is an international E-Commerce business that facilitates online payments and money transfers. PayPal established itself as the financial foundation for eBay’s early success. In 2002, eBay bought PayPal for $1.5 billion and has since seen continuous returns. Now, PayPal is used in nearly 200 international markets and supports 26 different currencies. PayPal processes over $150 billion in transactions yearly, and accounts for 40% of eBay’s revenue. As a result, some experts expect PayPal’s revenues to eventually exceed those generated by eBay’s marketplace. Regardless, eBay, much like its counterpart, is also slated to build upon its recent success.
The stock prices of Priceline, Expedia, Amazon, and eBay have all skyrocketed since the S&P 500 hit rock bottom in 2009. These four companies have all also gained large market shares in flourishing industries; furthermore, they have seized growing user bases that will serve as foundations for continued financial growth in the E-Commerce sector.