The e-commerce space has been a popular area to look for promising growth stocks. Global e-commerce grew 20.7% in 2019, according to eMarketer. It's a massive market valued at $3.5 trillion and will only get bigger from here. The right stocks are nearly certain to deliver big returns to investors.
Two stocks that are seeing explosive growth as consumers migrate online is Sea Limited (SE 4.51%) and Etsy (ETSY -1.37%). Another way to ride the growth of e-commerce is PayPal Holdings (PYPL -2.96%), one of the leaders in mobile payments. Here's why these three stocks should outperform over the long term.
Sea Limited: A fast-growing e-commerce marketplace in Southeast Asia
Sea Limited is the leading internet company in Southeast Asia and Taiwan. The seven markets it serves in these regions are twice the size of the U.S., with a population of 600 million, and it's one of the fastest-growing regions in terms of gross domestic product (GDP) per capita.
Sea's largest business is digital entertainment, which includes Garena, known for the Free Fire mobile game. The digital-entertainment segment has 402 million active users. Sea also has a leading fintech business with SeaMoney that offers e-wallet and payment services.
But Sea's Shopee e-commerce platform is on pace to surpass revenue from the digital-entertainment business. While adjusted revenue for digital entertainment rose 30% to reach $512.4 million last quarter, Sea's e-commerce business grew 111% to reach $314 million.
During the first-quarter conference call, CEO Forrest Li said, "Merchants are willing to keep investing in Shopee even in these tough times because they recognize the value that we offer, our unrivalled reach to consumers, and the return on their investment that Shopee provides." Li cited the recent partnership with Procter & Gamble as an example of top brands starting to use Shopee to sell products to the millions of consumers in the region.
"The coronavirus crisis is driving a step change in the growth of the digital economy globally, particularly in the markets and segments where Sea operates," Li said. "It has materially accelerated a shift to online lifestyles that is broad, deep, and, in our view, irreversible."
Investors are aware of Sea's growth potential. Its total market value is $54.7 billion, which is quite rich against revenue of $2.5 billion. But revenue has grown over 500% over the last three years, and with such a long growth runway in e-commerce, Sea Limited could easily justify its current valuation level.
Etsy: Expanding its horizons
Etsy is known as the marketplace of unique items you can't find anywhere else. That sounds very niche, but the numbers reveal a big growth opportunity.
Revenue grew 250% cumulatively over the last five years, and revenue growth has remained above 30% over the last five quarters. Demand for face masks, as COVID-19 spread in the U.S., was a boon for Etsy in the recent quarter. Growth on its marketplace remained at holiday levels, as Etsy's sellers sold 12 million masks in April alone.
The fact that Etsy can shift from selling things like vintage jeans and other specialty items to medical garments should be a warning to skeptics not to think too small about the company's long-term potential.
During the outbreak, demand was strong for other items, too. For example, Reverb, a marketplace for used music instruments that Etsy acquired last year for $275 million, saw healthy demand from first-time instrument buyers.
Etsy's trailing-12-month revenue is small at $877 million, but it's operating in a specialty-items market that's worth $100 billion. Even though the stock has already jumped 155% year to date, there's still of lot of headroom for it to grow, especially if Etsy can continue to leverage its search-and-discovery strengths to expand its category selection and increase order frequency from buyers.
PayPal: 325 million customer accounts and growing
PayPal has emerged as a top payments provider with 325 million active users on its platform, including the widely used peer-to-peer payments app Venmo. PayPal's research reveals that consumers are 50% more willing to transact with a merchant if PayPal is offered at checkout. That shows a strong brand that millions of users trust.
PayPal has grown very consistently over the years, but COVID-19 brought some benefits that outweighed pressure on cross-border transaction volume from China during the crisis. "One profound change will be a dramatic acceleration from physical to digital," CEO Dan Schulman said during the first-quarter conference call. "It's clear that digital payments have evolved from a nice-to-have capability to an essential service."
Schulman explained that PayPal experienced "unprecedented demand" during April. Transactions across its services increased 20% year over year, with branded-card transactions surging 43% year over year.
Further, net new active accounts hit a record in April, increasing 140% from January and February levels. PayPal added a record 10 million new customer accounts in the quarter. But Schulman stated, "that will pale in comparison to the 15 million to 20 million net new active accounts we anticipate adding in Q2."
PayPal was a great growth stock before the crisis, but the acceleration toward e-commerce and digital payments has sent PayPal stock up 65% year to date. The stock has never looked cheap since splitting from eBay in 2015. This is definitely a stock worth paying up for, and at 48 times free cash flow, it's not that expensive relative to underlying business momentum.
"There has always been a distinct secular trend toward digital payments, but the current environment has rapidly accelerated that movement," Schulman said. That statement can certainly apply to the broader e-commerce opportunity for Sea Limited and Etsy, too.