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3 Top E-commerce Stocks to Buy Right Now

By John Ballard - Nov 22, 2019 at 7:45AM

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Amazon.com, Shopify, and Stitch Fix are benefiting from the trillions being spent by consumers online.

The shift to a digital economy represents a challenge for some companies but abundant growth opportunities for those with the right technology and business strategy. It's estimated that global retail sales will rise by about 4.5% per year over the next four years, with most of the incremental dollar increase being driven by online sales. Global e-commerce sales are expected to climb 20.7% this year to reach $3.535 trillion, according to eMarketer.

Amazon.com ( AMZN 2.80% ), Shopify ( SHOP 6.47% ), and Stitch Fix ( SFIX 4.61% ) are three e-commerce stocks that should continue to hit new highs over the long term. Here's why.

A young woman using a laptop and holding a credit card.

Image source: Getty Images.

1. Amazon: The online retail titan still has plenty of growth ahead

As dominant as Amazon.com has become over the last 10 years, it still has a lot more left in the tank for investors. Consider that Amazon's trailing-12-month revenue, excluding its cloud business, is only 6.9% of global e-commerce sales. Amazon still has a lot of opportunity to not only ride a fast-moving tide but also gain more wallet share of consumers around the world.

Consistent with its DNA, Amazon is staying aggressive to win customer loyalty. Its latest move is to transition from two-day to one-day delivery for the more than 100 million customers who are Prime members.

One-day delivery will go a long way to growing sales, but one-day fulfillment is expensive for Amazon. Profits plunged 26% year over year last quarter, as the company picks up the tab to get customers' orders to their door one day faster.

However, history shows that when Amazon invests more in its business, it gets more back in return. Over the last decade, the company has significantly ramped up capital spending, but revenue has increased more than tenfold, and free cash flow has soared nearly sevenfold. The growth in free cash flow and net income has helped fuel a rapid rise in the stock price over the last five years.

Amazon has a massive opportunity to grow in e-commerce, a lot of cash to invest, and more revenue and profits to gain over time.

2. Shopify: Earn a royalty off millions of online transactions

Shopify has been one of the top-performing e-commerce stocks over the past few years. If you had invested $10,000 in Shopify at its IPO price in 2015, you would already have $123,000. Businesses of all sizes are rapidly adopting the company's range of software and checkout solutions that help merchants get up to speed with the digital economy.

Shopify now has more than 1 million merchants who take advantage of its services, including payments, shipping, and fulfillment. In the third quarter, revenue soared 45% year over year, with strong growth across subscription solutions and merchant solutions.

The knock against Shopify is the lack of profitability, but I don't see that as a concern at this early stage of the company's growth. It appears management is being responsible with its spending. Free cash flow has generally hovered right below breakeven. Plus, management credited its third-quarter growth to its international expansion efforts. Shopify also continues to invest in new features to enhance the platform for merchants.

Given the rapid rise in the stock, there is a debate about whether Shopify is overvalued. When you consider that Shopify's trailing-12-month gross merchandise value is only 1.5% of the $3.535 trillion e-commerce market, it's clear this company will be growing for a long time. The company's current market capitalization (total shares outstanding times the stock price) of $37 billion looks small relative to the total size of e-commerce sales. For those reasons, I believe the stock still represents a good investment for the long term at current levels.

3. Stitch Fix: A forward-thinking stylist

Stitch Fix continues to look like a solid growth stock in the apparel space. While some brick-and-mortar stores struggle with the consumer shift to online shopping, Stitch Fix posted 18% year-over-year growth in clients last quarter. That helped fuel a 36% increase in revenue. This is a forward-thinking company trying to simplify the experience of shopping for clothes, and it's clearly succeeding.

The great thing about Stitch Fix is that it doesn't require a subscription, unlike some other fashion recommendation services. Customers can queue up a Fix whenever they want, no strings attached. This is a key differentiating factor that is allowing Stitch Fix to appeal to prospective customers.

Another positive: It's growing the top line while showing a profit. The company reported a profit of $36.9 million in fiscal 2019 (which ended in July). That was down from the previous year's profit of $44.9 million. But as with Shopify, I'm not too concerned about annual profit growth at this early stage. The important thing for Stitch Fix is to show top-line growth and invest responsibly for growth without breaking the bank, which it is doing.

The company's secret sauce is data science, which helps the stylists get more informed about what clients like and don't like. As stylists get to know each client better, Stitch Fix can leverage that knowledge into driving higher spending out of its customer base. Management is already introducing new ways to use the service, like Shop Your Looks, which should encourage more frequent purchases.

One of the aspects I like most about Stitch Fix is that founder and CEO Katrina Lake owns 24% of the outstanding shares. Altogether, executives and directors own 89.5% of the company. It is very rare to see insider ownership that high. It's clear Lake has a passion for this business and wants to see the same long-term results as shareholders.

Growth stocks for the long term

Out of the three, Amazon is the largest company and the most tested. Shopify and Stitch Fix are smaller but are showing impressive revenue growth. Investors who are patient could see big gains over the next decade and beyond with these growth stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,523.29 (2.80%) $95.92
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$1,520.51 (6.47%) $92.39
StitchFix Stock Quote
StitchFix
SFIX
$24.97 (4.61%) $1.10

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

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