3 Dot-Com Deal Stocks That Could Yield Large Returns

Amazon opened the door of e-commerce, but new approaches from Zulily, Groupon, and RetailMeNot might open the door wider and lead to large gains in the process.

Mar 11, 2014 at 2:06PM

E-commerce has been a giant slayer to the big-box retailers, and while companies like Amazon.com (NASDAQ:AMZN) are well known, there are a slew of smaller U.S. dot-com companies that are making their presence known. Specifically, Zulily (NASDAQ:ZU), RetailMeNot (NASDAQ:SALE), and even Groupon (NASDAQ:GRPN) have found ways to become disruptive to the overall retail industry, which could yield large returns.

The bulk business model
The benefit to e-commerce, and why it has grown so rapidly, is because sites can offer a larger selection of goods and offer those products at near break-even prices. The reason is the absence of retail stores and the costs associated with upkeep.

Amazon has established a great model for giving consumers the best prices, but Zulily has perfected the pricing model by buying and shipping products in bulk. By doing so, it has created a loyal following of consumers and has even found a niche market with women's and baby products.

As a result of its bulk business model, annual revenue has soared from $18 million in 2010 to nearly $700 million last year. And with year-over-year growth in excess of 100%, Zulily's buy-in-bulk costs allowed it to generate profits of nearly $13 million last year.

For investors, the problem with Amazon has always been its lack of profit, but apparently, Zulily has found a way to solve this problem. This fact alone shows that Zulily is not only a growth machine but also solving the core e-commerce problem, making it very disruptive.

The coupons of e-commerce
Groupon began as a daily deal coupon company but has since reinvented itself to incorporate its coupon model in a large online marketplace that ranges from travel, services, and traditional Amazon-like goods. This move from selling everyday products to services and travel is what gives Groupon an edge in the space.

Therefore, Groupon's in a full-blown transition from couponing to e-commerce, thus making its 20% year-over-year total growth a bit misleading. Currently, e-commerce accounts for more than 40% of Groupon's total business and is growing at a 50% annual clip.

With Groupon's stock lower by nearly 70% since its 2011 IPO, investors don't seem to realize the growth or potential of the company's e-commerce business. As a result, Groupon becomes a value investment that could trade higher as e-commerce becomes a larger piece of its total business.

The anti-retail
RetailMeNot is exactly what it seems: it is a company created to fight the machine that is retail by allowing consumers to search and compare thousands of retailers/brands to search for the best deals, including coupons to particular stores.

Due to its 54% revenue growth and more than 560 million website visits last year, retailers have shown a clear willingness to offer great deals to reach the top of RetailMeNot's best deals. And while RetailMeNot is clearly not a conventional retail or e-commerce company, it shows a new degree at which this particular industry has been able to innovate.

In addition, and perhaps most impressively, RetailMeNot has been able to achieve an operating margin of 27% during a very aggressive growth phase. Hence, like Zulily, RetailMeNot is proving that companies in this industry can capitalize on high growth rates while still being highly profitable.

Final thoughts
In any industry, disruption equals stock gains, and each of these three companies is disruptive to the conventional ways of doing business in the e-commerce space.

Groupon is perhaps the most undervalued at just 2.3 times sales but must also find a solution to its e-commerce generating gross margin of only 7.9%. Thus, Groupon's e-commerce might provide different kinds of products and services relative to the space, but its profitability is along the same lines as an Amazon.

RetailMeNot is an edge to retail, with growth and profitability that make it attractive to investors and potential acquirers. However, Zulily is the real gem, operating a clear-cut e-commerce site with an innovating approach to buying and selling. Essentially, its growth, profitability, and then its valuation at 11 times sales are what make it appealing. Yet, regardless of which you find most appealing, each company is pushing the envelope with a disruptive service that could lead to long-term gains.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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