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3 Stocks That Could Put eBay's Returns to Shame

By Brian Stoffel, Travis Hoium, and Keith Noonan - Oct 19, 2017 at 10:30AM

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You've probably heard of one of these companies, but the other two might be new to most investors.

When it comes to e-commerce, eBay has undoubtedly been surpassed by Amazon.com. But eBay's original approach to the dynamics of the markets explains why: By creating a marketplace for goods to be exchanged -- and not, like Amazon, taking control of the entire supply chain -- eBay was able to scale its business much quicker.

The returns eBay has produced are nothing to sneeze at. Investors who bought in 1998, when the company went public, are sitting on gains of over 50,000% -- and have received shares of spin-off PayPal to boot.

Two blue lines drawn on glass showing little growth, with a red line with an arrow showing robust growth.

Image credit: Getty Images

But three of our Foolish investors think they've found a stock that could put eBay's run to shame. Read below to find out why JD.com (JD 0.29%), Square (SQ -2.88%), Shopify (SHOP -5.87%) and  could all be worth your time.

Forget eBay -- focus on "the Amazon of China"

Brian Stoffel (JD.com): Right now, JD is not the biggest e-commerce player in China. That title belongs to Alibaba. But just as Amazon eventually outshined eBay in the West, I expect JD to eventually eclipse Alibaba in China. 

My reasoning is simple: Alibaba reached scale quicker because it primarily provides a marketplace for buying and selling goods. That's a great, capital-light business model. But it has left the door open for a player willing to pay the up-front costs of vertically integrating as much of the e-commerce experience as possible. 

That's where JD comes in. The company has spent tons of money to build out a vast network of fulfillment centers: 256 warehouses and over 6,900 pickup and delivery stations in 2,655 districts and counties throughout China. That kind of of ubiquity guarantees faster delivery nationwide than anyone else in the Middle Kingdom, and provides an enviable moat against competition.

JD has also been growing at a breakneck pace.

Revenue at JD.com

With a stronger moat around it than the one eBay has in the West, I believe JD could put up even better returns.

The power behind small businesses

Travis Hoium (Square): The world is clearly moving to more digital transactions in commerce, whether in-person or online. Square is riding that trend as one of the leading payment processors for small businesses and it's expanding its value to customers by adding accounting, scheduling, payroll, and even loans. The combination has led to a tremendous amount of revenue growth, as you can see below. 

SQ Revenue (TTM) Chart

SQ Revenue (TTM) data by YCharts.

What's beautiful about the business is that it's very sticky for customers. Once a customer's systems are built around Square's platform, it's difficult to change systems on the fly. 

The downside of Square today is that it isn't profitable. The company is spending a lot of money on systems and sales that take away from the bottom line, but as it reaches a critical mass of offerings and customer sales it should see profits improve rapidly. We've seen some evidence of that recently, as evidenced by the smaller losses in 2017. 

To be a stock that can put eBay's returns to shame, Square has to continue growing its core processing business and leverage that to expand into new products. Square Cash and Square Capital are examples of where the company sees long-term growth, and I think they're the kind of products that will keep Square growing for years to come.

A fast-growing online sales platform

Keith Noonan (Shopify): The U.S. Department of Commerce reported that e-commerce grew roughly 16.2% year over year last quarter, while traditional retail grew only 0.5%. Even with that rapid growth, online sales accounted for just 8.9% of total retail sales. There aren't many surefire bets in life, but e-commerce continuing to quickly gain traction seems to be one of them -- and Shopify is in a position to facilitate and benefit from the transition.

Developing and maintaining an attractive and functional sales portal can be one of the most costly and time-intensive parts of setting up an online business. Shopify's service addresses that, making it easy for vendors of any size to quickly establish a customized digital storefront and outsource the hassles that might otherwise pop up down the line. It's also the kind of service that has a relatively high switching cost -- which should work to keep merchants within Shopify's ecosystem as long as the company continues to deliver a quality product.

As with most stocks that have the potential to deliver eBay-like returns, Shopify is an investment that comes with an above-average risk profile. The company is currently leading its category, but, with shares trading at roughly 14 times forward sales estimates, it's a speculation-heavy investment that's prone to big swings. Shares have taken a beating in October, trading down roughly 20% on the month so far, due to a critical report from Citron Research and new short interest, but that could present long-term investors with a buying opportunity.

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Stocks Mentioned

Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$32.97 (-5.87%) $-2.06
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$64.73 (0.29%) $0.19
Block, Inc. Stock Quote
Block, Inc.
SQ
$63.71 (-2.88%) $-1.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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