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3 Top E-Commerce Stocks to Buy Right Now

By Nicholas Rossolillo - Jan 30, 2021 at 10:55AM

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Decades after going mainstream, the internet continues to reshape the economy.

The internet was already quickly transforming commerce before 2020. But the pandemic did a number on the old way of buying and selling things. E-commerce became an essential part of life, and the trend looks far from spent. To that end, Target (TGT -5.06%), Farfetch (FTCH 9.45%), and Redfin (RDFN 4.58%) look like solid stocks to buy right now as 2021 gets under way.

Target: A real value within a high-growth industry

This big-box store has cracked the digital retail conundrum and has been booming in the last year. Total revenue at Target increased 19% year over year through the first nine months of its 2020 fiscal year, and earnings per share increased 25%, as investments the company made in recent years started to pay off. Whereas e-commerce used to represent a drag on Target's bottom line, it is turning into a serious tailwind.  

TGT Operating Margin (TTM) Chart

Data by YCharts.

The company's e-commerce-fueled rally continued during the holiday season. Target said comparable store sales (a blend of traffic and average guest ticket size) increased 17% year over year during November and December of 2020. Curbside pickup sales jumped more than 500%, while orders for same-day delivery via Shipt (the delivery service Target purchased in 2017) rose more than 300%.  

I purchased Target stock last spring during the economic lockdown, and it paid off. Households have grown increasingly reliant on big-box stores to fulfill both basic and discretionary needs. A new round of restrictions imposed in December and January could boost Target's sales again. And even after the stock increased over 50% over the last year, shares currently trade for a reasonable 12 times trailing-12-month free cash flow. Talk about a value for an old company with newfound growth.  

Target's secret sauce is its real estate. Its broad network of conveniently-located stores have allowed it to merge an old shopping experience with a modern online twist. Target has also launched its own brands across highly profitable retail segments like apparel and home goods, and it continues to pick up market share in these areas. While the pandemic has sent many retailers into a tailspin, it's cementing Target's place in the industry. Given the company's solid performance during the holiday shopping season, this retailer looks like a deal.

A young woman holding a smartphone and credit card.

Image source: Getty Images.

Farfetch: A marketplace disrupting the luxury scene

Let's shift gears from old retail to new, specifically the luxury segment. Luxury brands have been slow to embrace e-commerce -- at least until COVID-19 hit. Faced with little choice but to adapt, luxury shopping finally went the way of the internet.

This has worked wonders for Farfetch. The leading online marketplace for luxury shopping notched revenue growth of 77% through the first nine months of 2020 -- including a 71% year-over-year increase during the third quarter. But with just $1.13 billion of revenue in the first three quarters of 2020, Farfetch has plenty of room for growth in the roughly $300 billion global luxury goods market.

As of this writing, Farfetch has a market cap of $21 billion and trades for roughly 14 times its trailing 12-month sales. I think it could be a great long-term value. Besides adding new luxury merchants and buyers to its platform, Farfetch just started a joint venture with Alibaba to establish its online marketplace in mainland China: the largest market in the world for luxury items. This could help keep sales growing at double-digit rates even after the pandemic subsides.

Nevertheless, Farfetch stock is risky. E-commerce could cool off dramatically for luxury goods post-pandemic. Farfetch also isn't profitable yet. Free cash flow was negative $101 million through the first nine months of the year, compared to negative $185 million during the same period a year ago.

Given that it isn't profitable yet, I expect Farfetch stock to be very volatile in the years ahead, but it's a high-risk, high-reward e-commerce play worth giving some attention.

Redfin: Residential real estate could use a shot of simplicity

E-commerce doesn't just involve the sale and purchase of merchandise. Bigger-ticket items are also getting a digital makeover, including real estate transactions. So far, the process of buying or selling a home hasn't changed much. Sure, companies like Zillow have made it easier to browse listings online and get a feel for the value of a property. But the actual process of buying a home remains complex and expensive.

A number of companies -- Zillow included -- aim to change that. But Redfin remains atop my list of buys in this department. For a flat percentage fee, a homeowner can sell their property directly to Redfin and skip much of the headache like making repairs, vacating the home for showings, and dealing with an agent. Or, for a more traditional experience, Redfin uses technology to list homes with its agents, but at a far lower cost than its older peers in the real estate business.  

The pandemic-driven work-from-home movement has set off an American migration from the most crowded cities to suburban and rural areas, and Redfin has benefited. Revenue grew 17% to $642 million through the first nine months of 2020. More importantly, though, free cash flow has swung positive as Redfin's instant cash offer service and other tech-enhanced services like its mortgage division started to reach profitable scale. Free cash flow reached $41 million, compared to negative $145 million during the same period last year.  

The real estate market remains ripe for the picking, so I'm still bullish on Redfin's prospects. After all, its market share of U.S. existing home sales by value during Q3 2020 was a mere 1.04%. With plenty of room to make further inroads in the housing industry and flush with net cash totaling $377 million at the end of September, this stock looks like a reasonable value at just over eight times trailing 12-month sales.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$153.43 (-5.06%) $-8.18
Redfin Corporation Stock Quote
Redfin Corporation
RDFN
$10.72 (4.58%) $0.47
Farfetch Limited Stock Quote
Farfetch Limited
FTCH
$8.69 (9.45%) $0.75

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

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