Is the Amazon of Russia, Ozon, Worth a Buy?

For E-commerce stocks it’s been an incredible pandemic, with E-commerce adoption up very steeply for obvious reasons. Just look at the stock price of $PDD, $JD, $AMZN and $SHOP.

But what if you could go back in time to 2002, and buy Amazon when it was still cheap — say, about $6 billion in market cap? Would you like to do that? $OZON is to some the Amazon of Russia in a rare Russian IPO in the U.S.

Russian online retailer Ozon Holdings raised $990 million from an initial stock offering on Nasdaq on November 24th, 2020 and was up 35% on the first day. You know how it goes, it’s a growing business but is far from profitable. Revenue is going up pretty steeply however YOY and it’s a pretty big total addressable market in Russia.

It’s very much a clone of Amazon, it would seem. In addition to selling goods itself, it allows third-party sellers to sell goods on its website. Its business thus mirrors that pioneered by Amazon.com, which went public in the U.S. in 1997. It is also headquartered in Nicosia, Cyprus, for tax reasons.

Ozon Holdings does business almost exclusively in Russia, operating as an internet-based purveyor of everything from toys to electronics, to furniture, food, and fast-moving consumer goods. Ozon filed an F-1/A filing with the SEC, laying out its business, its prospects, and its financials for potential investors to take a look. It started off with an IPO price of $30. Reasonable it would seem.

Moscow-based Ozon is the first Russian IPO to list on U.S. domestic exchanges since May 2019. With increased scrutiny on Chinese stocks can we trust a Russian company? Ozon is the country’s second-largest e-commerce player. Interest in Ozon’s stock market debut has been strong in the weeks leading up to the IPO. It’s not like Amazon though, it doesn’t have a monopoly on its country’s E-commerce sales.

Ozon calls itself “the most trusted and respected online retailer in” Russia, and says its name “has become synonymous with online shopping” in the country. But it only has a 6.6% share of E-commerce sales there. The Amazon comparison seems far fetched. Amazon has around a 38% share of the U.S.

Ozon raked in more than $1 billion from the IPO which it will use to bolster its logistics. Ozon would have you think that’s it’s a leading e-commerce platform in the large, fragmented, underpenetrated and growing Russian e-commerce market, but that doesn’t even really seem true. However its growth story in recent months has been good, very good. For the nine-month period ended Sept. 30, Ozon reported revenue of $876.5 million, up 70% in Russian currency.

In a market where e-commerce sales grew 51% year-over-year in the first half of 2020, Ozon’s year-to-date sales grew 70%. 8,100 sellers use Ozon to sell to customers numbering either 51 million (those who have downloaded its shopping app), 41 million (those who have ever shopped on Ozon), or 11.4 million (“active buyers” who have used the service within the past year). Growth is also a persuasive story, even if it’s taken Ozon a lot longer than Amazon to reach any semblance of dominance in its industry.

About 51% of Ozon’s gross merchandise volume, or GMV, are sales directly from Ozon to consumers. 45% of GMV are high-margin sales from third parties to consumers conducted on Ozon’s Marketplace. The problem is losses are not shrinking. It’s a bit of a Russian embarrassment actually.

Ozon was founded 22 years ago, but has struggled to turn a profit. In 2011, investors had to step in with a new round of funding to “save” the business. Could that happen again? It’s highly possible.

Is it worth a serious investment? If you believe the Amazon model can work in Russia. Ozon will likely continue to expand rapidly and eat up market share in a Russian e-commerce industry which has significantly lagged its international peers in size and maturity.

The Russian e-commerce market will grow at an annual rate of around 33% in the coming years and Ozon seems well positioned to take at least some of that growth.

The chief executive of Ozon is Alexander Shulgin, 43, who previously worked as CEO of the Russian division of Yandex. Ozon has already lost about $170 million so far this year, and is likely to end the year with a sizeable net loss. So what? Amazon struggled with profitability for ages.

Chasing a rapid-growth model charted by many tech companies, Ozon has prioritized gaining market share and boosting revenues over profit. It’s the boom or bust model we’ve seen with Amazon and even Tesla.

Ozon also appears to have what Amazon and Tesla have, brand recognition from consumers. Ozon in 2020, it appears, is by far the most recognized brand among all online retailers in Russia, with twice the brand recognition of its nearest competitor.

Look at the competitors, they aren’t exactly stellar names or brands: AliExpress Russia, Yandex Market, Citilink or electronics retailer MVideo. Ozon feels and is way more crafty. Ozon’s total market capitalization is currently $7.4 billion, meaning it’s early days for this company still, and a decent bet on the future of E-commerce in Russia.

This was the right time for Ozon to go IPO amid unprecedented liquidity heading back into the market. Ozon can thus surf to success while using the cash from the IPO to bolster its already fast growing business.

Ozon had 11.4 million active buyers in the 12 months ended Sept. 30. That’s up 138% from the year-ago period. With such a speculative market, investors will always invest in growth stories. In spite of the risks, this makes Ozon a buy and a long-term investment in the future of E-commerce.

If you are not sure whether $OZON is a good deal, just think about Mercado Libra, the so-called ‘Amazon of Brazil’, and look at its stock $MELI. While South America isn’t exactly India for E-commerce growth, it’s not half bad and has more similarities to Russia than you might think.

All in all, 2021 will be a great year to invest in E-commerce platforms, if you didn’t already in the 2015 to 2020 period. The Covid-19 event has stimulated and accelerated E-commerce development that favors big-box players while small businesses were disrupted. Even in the U.S. Black Friday in-store sales were easily down 50% for obvious reasons.