eBay (EBAY 1.73%) has been a rewarding investment for patient shareholders. While the company's active user base has grown at a low-single-digit pace recently, eBay is consistent, and the business generates tons of free cash flow. The stock is up 73% over the last five years, and management just initiated the company's first quarterly dividend.
Still, there are much better ways to invest in the booming e-commerce market. PayPal Holdings (PYPL 1.87%), Shopify (SHOP 0.88%), and Alibaba Group Holding (BABA 2.43%) are growing much faster, and their stock prices have all outperformed eBay's in recent years.
The opportunities in e-commerce are so massive that I believe these companies have a lot more in the tank. Here's why.
The ubiquitous digital payment provider
First up, PayPal's performance continues to impress investors, with the stock up 31% year to date. Revenue has nearly doubled over the last five years, as the company's partnerships and its strategy of spreading the brand across millions of merchants is attracting new users in droves. PayPal finished the first quarter with 277 million customer accounts, up 17% year over year.
Management is not taking its foot off the gas. The company recently made a $500 million investment in Uber Technologies, which could pay off big as the two companies collaborate on Uber's digital wallet service. PayPal also made a $750 million investment in the fast-growing Latin American marketplace Mercadolibre.
Along with those investments, PayPal also partnered with Facebook to be a payment provider on Instagram. All these moves show PayPal beginning to cement its brand as a fixture of fast-growing e-commerce and social media platforms.
There's also Venmo, where management has made great strides toward monetizing the payment app that made up 13% of PayPal's total payment volume last quarter. During the last call, management disclosed that Venmo's annual run rate in revenue is now more than $300 million, up from $200 million in the fourth quarter. While Venmo is unprofitable, management is working to make the app as profitable as PayPal's core platform down the road.
PayPal stock trades at a forward P/E ratio of 37 times this year's earnings estimates, and analysts expect the company to grow earnings by 20% per year over the next five years.
The bridge to e-commerce for all merchants
Shopify started as a tool to help founder Tobias Lutke and Scott Lake sell snowboards online but has become the largest e-commerce platform for small businesses. Revenue has grown at an exponential rate of more than 1,000% in just the last five years. Since the IPO in 2015, the stock has delivered equally impressive gains of 971%.
That growth trajectory points to a massive addressable market. Shopify estimates its revenue potential at $70 billion, which is based on the 47 million retail merchants globally combined with Shopify's average revenue per user of $1,484 in 2018.
However, the company's average revenue per user could gradually increase, pushing up its addressable market over time. More merchants may opt for upgrades and pricier plans like Shopify Plus, a $2,000-per-year subscription service.
Shopify's trailing 12-month revenue stands at $1.18 billion, so given the current momentum, the company is nowhere close to reaching its potential. It's very encouraging to see top consumer brands like Johnson & Johnson and Procter & Gamble continue to join Shopify Plus.
The stock is difficult to value right now due to lack of profits, as management plows all gross profit back into the business to meet the demand. The company is starting to invest in international expansion and is also spending heavily on marketing and new products. All told, Shopify is one stock you'll be glad you bought in 20 years.
The do-everything Chinese tech giant
Alibaba is dominating e-commerce in China -- a market that is basically closed off to foreign competition. Last year, revenue soared 39% year over year (excluding acquisitions), driven by strong growth in Alibaba's retail marketplaces, including Tmall and Taobao.
One of the key advantages for Alibaba is its Alipay digital payment service. AliPay and Tencent's mobile payment service control a combined 93% share of China's digital payment market. Alibaba has successfully steered users who use Alipay to shop at the company's marketplaces, which now have 721 million monthly active users on mobile.
While Alibaba's commerce platforms generate the bulk of revenue and profits, the company also has a long runway of growth in its cloud computing business, which saw revenue climb 84% last year. Digital media, entertainment, and other services, including smart speakers and mobile digital map technology (Amap), round out a roster of services and content to drive long-term growth.
The stock has outperformed the broader market over the last five years but stalled out last year over concerns about the Chinese economy. However, as recent results demonstrate, Alibaba still has the growth to power market-beating returns for those who are patient.
The forward P/E multiple has fallen dramatically over the last year, which means investors can buy one of the most dominant e-commerce/tech giants in the world at a more attractive valuation of 23 times this year's earnings estimates. That's attractive for a company still growing revenue by 39% year over year.