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.

Go out in style
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers