E-commerce and digital payments have changed the world over the last decade, and they will continue to be powerful trends over the next 10 years. In my experience, identifying these transformative shifts can be a great starting place when looking for investments. With that philosophy in mind, both Square (NYSE:SQ) and Etsy (NASDAQ:ETSY) could help investors realize big gains in the future. Here's why.

Square: Empowering sellers and consumers

Square's mission is to empower people by providing the tools they need to participate in the economy, whether that's as a seller, a consumer, or both. Management sees this as a $160 billion market opportunity, and Square has barely scratched the surface.

Person holding tablet with digital icon of rocket blasting off above it

Image source: Getty Images.

For sellers, Square provides the tools needed to run a business, from specialized point-of-sale software to marketing, analytics, inventory, and payroll solutions. More recently, the company expanded its efforts in e-commerce and launched Square Online, which allows merchants to easily build an e-commerce storefront. Square's platform also lets merchants sell on social media like Facebook, Instagram, and Pinterest, or use Square's payment processing on third-party e-commerce platforms like Wix.

Most importantly, all of these products work together as one solution. For example, retailers operating online and at multiple physical locations can sync orders, inventory, and customer data to their point-of-sale system, allowing them to manage their entire business from the Square dashboard . This comprehensive offering sets Square apart from many payment processors, which often require merchants to use a combination of different products.

Square's Cash App is a digital wallet that makes it possible for consumers to send, spend, and invest money. In addition to peer-to-peer (P2P) transfers, Square now offers services like direct deposit and the Square Cash Card, a debit card that allows consumers to spend their Cash App balance in stores or online. Consumers can also invest in U.S. stocks and ETFs, and buy and sell bitcoin through the Cash App. Similar to its tools for sellers, Square is building a platform for consumers, and every new service helps drive engagement. In fact, in the most recent quarter, the total balance of all Cash App accounts jumped 180% compared to the prior year.

Strong adoption across both the Seller and Cash App ecosystems has caused gross profit and free cash flow to explode.

Metric

2017

Q3 2020 (TTM)

Change

Gross profit

$839.3 million

$2.5 billion

193%

Free cash flow

$101.6 million

$219.0 million

116%

Source: Square SEC filings. TTM: trailing 12-months.

Even so, Square's story is just beginning. This fintech company's enormous market opportunity, paired with tailwinds from digital payments and e-commerce, should power growth for many years to come.

Etsy: The marketplace for unique goods

Etsy's global marketplace connects creative sellers with buyers looking for unique or personalized items. For example, if you need a desk custom-built by a woodworker, a dress tailored by a designer, or a portrait painted by an artist, you can find it on Etsy.

Etsy brick office building covered in ivy.

Image source: Etsy.

One of Etsy's greatest advantages is its alignment with sellers. Etsy charges its sellers less than competing platforms like Amazon Handmade, and the company has invested heavily in helping its sellers succeed. For instance, in 2016, Etsy launched Pattern, a service that allows sellers to build their own websites for $15 per month. This helps sellers personalize and differentiate their brands, something that's difficult to do on other marketplaces.

Etsy's alignment with sellers has been a powerful growth driver. In fact, Etsy's gross merchandise sales (the value of all goods sold on the marketplace) accelerated in each of the last eight quarters, driven by a rapidly expanding ecosystem of buyers and sellers. Even more impressive, Etsy's GMS per active buyer has also increased in each of the last eight quarters, an indication that Etsy is more effectively monetizing each consumer on its platform. Ultimately, these metrics have translated into strong growth in revenue and free cash flow.

Metric

2017

Q3 2020 (TTM)

Change

Revenue

$441.2 million

$1.4 billion

212%

Free cash flow

$55.9 million

$507 million

806%

Source: Etsy SEC filings.

In fiscal 2020, Etsy's business shifted into high gear as the pandemic drove shoppers online. In fact, GMS and revenue both jumped over 100% in the first nine months of the year. But the company still has plenty of room to grow -- management estimates Etsy's market opportunity will reach $437 billion by 2023, more than 300 times the company's trailing 12-month revenue. And e-commerce and digital payments should only become more popular in the coming years, creating tailwinds for Etsy's business.

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.