I recently ordered several products and services online as part of a hectic weekend of birthdays for family and friends, and other celebrations.
First was an online search and booking for a hotel room. Then, an online booking for an art gallery exhibition. Dinner was booked through an online restaurant platform and flowers ordered through an online service.
My experience online reinforced the importance of digital marketing for retailers and getting access to consumers through online platforms. I also thought about the software behind those platforms and the firms providing it.
Software-as-a-Service (SaaS) is a beautiful business model when it works. The best providers have mission-critical software, high pricing power, fat profit margins, recurring income and capital-light business models.
SaaS is even better when it intersects with other megatrends, such as growth in online retailing and e-commerce. As more retailers earn more of their income online this decade, demand for back-end digital services will rise.
Start with online retailing. For all the gloom about the global economy, online retail companies have collectively performed strongly.
The Betashares Online Retail and E-Commerce ETF (ASX: IBUY) is up 28.4% over 12 months to end-May 2024, after heavy falls in 2022. IBUY tracks an index comprising up to 100 leading global online retailers and e-commerce providers.
Chart 1: BetaShares Online Retail and E-Commerce ETF
Source Google Finance
IBUY includes some star companies, such as Booking Holdings, which has soared in the past 18 months. The US-based travel technology company owns booking.com, priceline.com, cheapflights.com, opentable.com, rentalcars.com and a range of other online booking platforms.
I like IBUY as a long-term play on growth in global online retailing and e-commerce. It’s easy to give up on a thematic ETF after it rallies, but IBUY’s gains over 12 months broadly take it back to where it was in early 2022.
With US inflation cooling and interest rates there likely to be cut in the next few months, US discretionary spending should improve in 2025. The conclusion of the US Presidential election in 2024 could be another spending tailwind for online retailers and e-commerce platforms.
Moreover, IBUY’s average forward Price Earnings (PE) multiple of about 20 times does not seem excessive given its top 10 holdings include a who’s who of global online retailers, e-commerce providers and online booking platforms. IBUY’s top holdings also include a few undervalued Asian-based tech companies.
Price gains might be slower from here for IBUY. A period of price consolidation or weakness would not surprise, given the strength of its rally. But there’s much to like about an ETF that provides exposure to the world’s best online retailers and e-commerce providers for long-term, growth-focused investors.
IBUY’s annual management fee is 0.67%. It is unhedged for currency movements, meaning prospective investors have to consider currency risk.
Australian stock exposures
Investors wanting to pinpoint their exposure to online retailers should consider local options. In Australia, key online retailers include Kogan.com, Temple & Webster and Cettire, which has been battered lately.
Kogan.com looks undervalued after sharp price falls in the past 12 months. A weak trading update this year and market concerns about the impact of Amazon.com’s growth in Australia on Kogan.com have weighed on the stock.
But at $4.25 a share, the market is factoring too much bad news into Kogan.com’s valuation. A recovery will take time – and further losses are possible. Still, long-term value is emerging for experienced, risk-tolerant investors.
Chart 2: Kogan.com (ASX: KGN)
Source: Google Finance
Elsewhere, Temple & Webster Group, the online furniture and homeware provider, looks mildly undervalued after shedding about a third of its value since March.
Temple & Webster is operationally performing well, but cost-of-living pressures in Australia are expected to dent demand for discretionary purchases like homewares this year – a trend likely to be confirmed for Australia’s retail stocks in the profit-reporting season in August.
Chart 3: Temple & Webster Group (ASX: TPW)
Source: Google Finance
Cettire, the online luxury goods retailer, is a tricky call. The market couldn’t get enough of Cettire earlier this year, but its shares plunged after a savage profit downgrade, concerns about luxury-goods discounting, and broader fears about the sustainability of Cettire’s business model.
Cettire has fallen from a 52-week high of $4,90 to $1.38. That might attract bargain hunters, but I prefer to stand aside and wait for more clarity on Cettire’s performance. Winning back the market’s confidence will not be easy for Cettire, a volatile, higher-risk stock that has attracted some controversy.
Chart 4: Cettire (ASX: CTT)
Source; Google Finance
Retailing aside, my local preference for online commerce is SiteMinder, a technology company that provides software for small and mid-size hotels.
SiteMinder is thought to be the world’s largest e-commerce software provider for hotels in its segment, serving more than 40,000 accommodation businesses in over 150 countries. SiteMinder provides online infrastructure for hotels to connect to travel platforms such as Booking.com and Expedia.com. These and other channels are critical for hotels to compete for online bookings.
SiteMinder also provides software for direct bookings, search-engine optimisation, payments and analytics. Morningstar has described SiteMinder as the “Shopify” for mid-size and small hotels. Just as Shopify, a Canadian-based tech company helps small businesses transition to e-commerce, so, too, does SiteMinder in the hotel business, at least for smaller hotels that lack digital infrastructure.
SiteMinder listed on ASX in November 2021 at $5.06 a share. After a strong start, the shares sunk to $2.77 by mid-2023, SiteMinder has since recovered to $5.07. So, for all the progress, SiteMinder is back to its offer price.
SiteMinder should continue to increase its global market share in accommodation software for small and mid-sized hotels, amid product enhancements, a deeper partnership with Trip.com, and the benefits of greater scale.
Released in April SiteMinder’s Q3FY24 trading update reported 23% growth in revenue year-on-year to $46 million. Importantly, annualised recurring revenue increased 24.8% to $187.6 million over the year and there was good momentum in net subscriber additions as SiteMinder signed up larger hotels.
SiteMinder is targeting organic revenue growth of 30% in the medium term and expects to be cashflow positive and profitable in H2FY2024. Its deepening partnership with Trip.com, a leading online travel company, enables hoteliers who use SiteMinder software to access a larger audience, including travellers in the recovering outbound Chinese tourism market.
Morningstar values SiteMinder at $10 a share, almost double its current price. It rates SiteMinder as the most undervalued SaaS stock on ASX.
I’m not as bullish, but like Morningstar, see latent value in SiteMinder for long-term investors. Software that links hoteliers to the public through online booking platforms is ‘mission critical’ given so many people book hotels and accommodation through platforms rather than directly.
SiteMinder has an excellent position in its market and room for long-term growth in what is still a fragmented market for accommodation software. Capitalised at $1,41 billion, SiteMinder does not yet have the valuation of other Australian SaaS stocks that built a strong foothold in global markets.
After strong gains in the past 12 months, SiteMinder is due for possible share-price consolidation or a pullback. That could be an opportunity for long-term investors who want exposure to the intersection of powerful global megatrends such as e-commerce, SaaS and online bookings.
Chart 5: SiteMinder (ASX: SDR)
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 16 July 2024.
