E-commerce continues to gain ground the world over, and that's a trend that will only continue. Market research company eMarketer estimates that global business-to-consumer e-commerce spending will come in at roughly $2.84 trillion this year, and rise to $4.88 trillion in 2021, and companies that facilitate that growth could deliver great results for their shareholders. Within that mold, Shopify (NYSE:SHOP) and Baozun (NASDAQ:BZUN) are stocks that are worth considering.
Online retail has grown by leaps and bounds in the U.S., but there's still huge room for it to expand. The U.S. Department of Commerce tracked a 15.2% year-over-year increase for online retail in the second quarter. Even with that growth, it accounted for just 9.6% of total retail sales. This bodes well for Shopify, which makes it easier for businesses to get on board with e-commerce. Shopify's valuation has already increased by nearly 500% since its initial public offering in 2015.
Shopify provides its clients with customizable retail websites as well as portals integrated with major social media sites like Facebook and Instagram. Though it initially catered to small- and medium-size enterprises (SMEs), it's now devoting more resources to moving upmarket and is having success in getting larger businesses on board. It generates revenue from businesses subscribing to its web and payment processing services and by collecting transaction fees for every item sold through its platform.
The company operated 160,000 online stores at the time of its IPO. As of the end of its most recent June quarter, that number has increased to more 600,000 across approximately 175 countries. Yet it's still just scratching the surface of its addressable market.
In the second quarter, Shopify delivered a 62% year-over-year sales increase, and gross merchandise volume on its platform climbed 56% to $9.1 billion. It's delivering rapid, cost-effective revenue growth, which suggests that it could shift to booking regular profits if it wasn't prioritizing expanding its business. The company expects adjusted operating income for the current year of between $0 and $5 million -- roughly in line with the $6 million in adjusted operating income it recorded last year -- but it also expects that sales grow roughly 49% to $1.02 billion at the midpoint of its target range.
The company is also expanding its business footprint; it recently rolled out payment processing services in Japan, bringing the number of countries where that service is available to eight. That still leaves a lot of room for expansion for Shopify Payments, and the company has plans to bring more of its service offerings to new markets in the near future.
Shopify's forward price-to-sales ratio of roughly 17 might be a reason to take a somewhat cautious approach, but the business has huge growth potential, and I'm keeping an eye on the stock as a possible buy.
Baozun is sometimes referred to as "the Shopify of China" because it also provides customizable online sales platforms for businesses. However, while Shopify started out focused on SMEs, Baozun's client base consists of established Western brands -- including big names like Nike, Microsoft, Starbucks, and Calvin Klein.
The Chinese company provides its brand partners with online stores and sales portals on China's biggest e-commerce hubs, such as Alibaba's Tmall, JD.com, and Tencent's WeChat social messaging app. This makes it easy for Western brands to quickly establish and scale their presence in that country's rapidly growing online retail market.
I already own Baozun stock and am thinking of adding to my position in the near future, because even though the share price has climbed roughly 900% over the last three years, it still looks to have substantial upside. The company has steadily increased its base of merchant partners, adding 26 new clients in the 12-month period that ended in June, and has teased that it will have some big new brand partners to announce within the next year. Sales climbed 31% year over year in the June quarter, gross merchandise volume sold on its platform increased by 68%, and adjusted net income rose 34%.
China's online retail spending grew 32% annually in 2017 to reach roughly $1.15 trillion -- making it the world's largest e-commerce market by far -- and that incredible growth rate should continue to work to Baozun's advantage. The company could also potentially take a page out of Shopify's book and offer its web-store creation services to domestic SMEs. The service already has plenty of room for growth as it adds new Western partners and increases the total volume of sales conducted through its platform, but pursuing the SME market could dramatically expand its revenues.
Baozun is trades at roughly 45 times this year's expected earnings. While that multiple might deter more risk-averse investors in light of the U.S.-China trade war, there's a lot to like about the company's outlook.