If a company can’t compete in the digital space, it’s doomed.

This has been my investment thesis over the past several years. And it seems to be the case once again this earnings season.

Walmart (NYSE: WMT) shares tumbled more than 10% as its digital sales growth weakened. Target (NYSE: TGT) shares dropped 4.5% as its profits slipped.

Shares of ailing department store J.C. Penney (NYSE: JCP) fell 5.4% as it was once again forced to slash jobs. And mall-based retailers posted holiday results that left me less than optimistic.

Meanwhile, shares of discount retailer Dollar Tree (Nasdaq: DLTR) sank more than 14.5% on an ugly fourth quarter.

I do give J.C. Penney and Sears Holdings (Nasdaq: SHLD) credit for still existing because they’re suffering a long, drawn out, slow and painful death… Shares of both are down more than 80% over the past five years.

I know, some investors are never going to let go of these cherished jewels of a bygone era. But Sears is now essentially a microcap stock.

So far this year, we’ve seen digital retailers outperforming brick-and-mortars by a wide margin once again.

And Amplify Online Retail ETF (Nasdaq: IBUY) is crushing VanEck Vectors Retail ETF (NYSE: RTH) and SPDR S&P Retail ETF (NYSE: XRT)…

The Amplify Online Retail ETF is focused solely on internet retailers. It’s more than doubled the performance of the VanEck Vectors Retail ETF, while the SPDR S&P Retail ETF has struggled to keep its head above water.

Amplify Online Retail ETF’s largest holdings are diverse: Amazon (Nasdaq: AMZN), Etsy (Nasdaq: ETSY), GrubHub (NYSE: GRUB), Lands’ End (Nasdaq: LE), Netflix (Nasdaq: NFLX) and Shutterfly (Nasdaq: SFLY).

 

More importantly, instead of tanking on earnings, Etsy, GrubHub and Shutterfly soared more than 20% each in a single day on fantastic holiday season reports.

Of those largest holdings, only Lands’ End struggled.

Skeptical investors may look at VanEck Vectors Retail ETF in the first chart and see that it’s up more than 4% year to date.

Since it mostly holds retailers with physical stores, doesn’t that mean there’s a bunch of tremendous brick-and-mortar stories?

Well, not so fast… Amazon makes up 25% of the ETF.

That’s right… VanEck Vectors Retail ETF holds 26 positions. Yet one-quarter of it is weighted in a single company.

For comparison, Amplify Online Retail ETF holds 42 positions, with Amazon accounting for just 3.7% of its weight.

I’ll often hear the argument that online retail makes up only a small portion of total retail.

That’s 100% true.

But that doesn’t substantiate an argument against online retail. In fact, it proves my thesis about how much room e-commerce stocks have to run.

Look at it this way… In 2000, U.S. online annual retail sales were $27.5 billion. That seemed like a lot.

But between 2000 and the end of 2017, online sales grew 1,649% to $453.5 billion.

And that’s just in the U.S., which isn’t even close to being the largest online retail market in the world – China owns that label by a long shot.

In 2017, global e-commerce sales grew 23% to more than $2 trillion… and yet online sales represented only one-tenth of total retail sales worldwide.

By 2021, global e-commerce sales will double to $4.5 trillion.

We’re arguably still in the early stages. This is something that’s started to take off only in the last decade.

There’s still massive upside ahead… especially as the younger generations adopt online retail as the norm.

Good investing,

Matthew

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.