If you bought shares of eBay (EBAY 1.01%) when it went public in 1998, your investment would have soared by more than 4,000% over the past two decades. The company was one of the survivors of the dot-com bust, and those able to hold on through the carnage have done very well.
Figuring out which of today's companies will be the next eBay is mostly a guessing game, but there are a few contenders with the potential to deliver eBay-level returns over the long run. Here's why three of our Foolish investors think MercadoLibre (MELI -1.98%), Wayfair (W -0.02%), and Five Below (FIVE -0.07%) could have an eBay-sized effect on your portfolio.
Image source: eBay.
The eBay of Latin America
Danny Vena (MercadoLibre): From a mere $47 million in revenue in 1998, eBay would become the preeminent online auction site and produce revenue of nearly $9 billion in 2016. They joined buyers and sellers, facilitated transactions, provided secure online payments, and offered advertising and shipping -- while taking a cut of each transaction.
Today, Latin American e-commerce site MercadoLibre offers all of that and much more. Previously called the "eBay of Latin America," the company has expanded its operations and provides numerous services offered by Amazon.com, PayPal, and Shopify Inc.
Its biggest opportunity lies in the fact that it's still early days for e-commerce in Latin America. Online sales account for less than 3% of retail sales in the region, compared to 8.5% in the U.S. Additionally, internet penetration in the region is growing quickly, but at 62%, it still lags far behind the 89% penetration in the U.S.
As the largest e-commerce platform in the region, MercadoLibre provides merchants with a customizable platform to set up their online store, handle payments, arrange shipping, and promote their products -- while getting a piece of each transaction.
Operationally, the company is growing like gangbusters. In the most recent quarter, registered users reached 191 million, year-over-year growth of over 20%. Items sold reached 61 million, up 40% over the prior-year quarter. Payment transactions saw a 10th consecutive quarter of year-over-year growth that exceeded 60%, as off-platform merchants adopted its payment service, MercadoPago.
For 2016, revenue grew 29% year over year to $844 million, while net income of $136 million grew 29% over the prior year.
As more consumers in Latin America gain access to the internet and begin using e-commerce, MercadoLibre has the most to gain from the trend, and it could even exceed its namesake.
Growth at all costs
Tim Green (Wayfair): If you want to invest in a fast-growing e-commerce company, furniture and home goods seller Wayfair is an obvious choice. During the latest quarter, revenue soared 43% year over year to $1.1 billion, and the number of orders delivered jumped 46% to 4.3 million. Repeat customers placed 2.6 million of those orders, a sign that Wayfair is garnering some customer loyalty.
According to Wayfair, just 9% of the market for home goods has moved online. That percentage is expected to rise in the coming years, with the company estimating that the online home goods market will expand by 15% annually through 2025. Wayfair has a small piece of a market that's expected to nearly quadruple in size over the next nine years.
There's a downside to investing in Wayfair, and it's a big one. The company is not even in the ballpark of being profitable, despite annual revenue of almost $4 billion. Wayfair has posted a net loss of $200 million over the past 12 months, and a free cash flow of negative $61 million. The company plows a double-digit percentage of revenue into advertising, which leads to big losses thanks to a middling 24% gross margin.
I'm not convinced Wayfair will ever be profitable. But if you want to bet on an e-commerce company that's posting blockbuster revenue growth, look no further than Wayfair.
Don't get frozen out of this stock
Rich Duprey (Five Below): When the fidget spinner craze hit, Five Below was an obvious choice to cash in. It typically looks for "trend right" products that it can sell in its $5 or less price range, and this gadget was a perfect fit. But the success of the specialty retailer is more than betting big on one-hit-wonder fads, and while its stock will rise and fall as these toys fall in and out of favor, Five Below will continue to grow.
Much like the dollar-store chains that succeeded primarily by selling goods for a dollar or less, the sweet spot for the deep discount chains seems to be keeping it below a fin. Leading deep discounter Dollar General (DG 0.82%) notes that more than 80% of its SKUs are at the $5 level or lower.
In its first-quarter earnings report in June, Five Below noted sales jumped 21% and comparable-store sales were nearly 3% higher, with most of that coming before the spinner trend hit and despite going up against the toughest comps of the year. The retailer figures spinners will carry it through the second quarter, but it doesn't know whether the toy will be long- or short-lived.
And ultimately, it doesn't matter. Each year, there seems to be a new must-have gadget that gains popularity, and as Five Below goes through their lifecycle, it becomes better at picking them and merchandising them. But fads like fidget spinners are just the biscuit wheels on the gravy train it's driving. It has a base of products that continue to bring in customers who are allowing it to expand greatly.
Last year, Five Below opened 85 net new stores, up from 71 in 2015, and this year, it anticipates opening as many as 100 locations, with 48 already opened. Although the specialty retailer trades at 37 times earnings and 25 times next year's estimates, meaning Five Below's stock isn't as discounted as the products it sells, the market seems to be willing to pay up for a retailer that has found a "trend right" company offering a good mix of price, value, and profit.
