If you want to spice up your portfolio, adding a few top e-commerce stocks to it should do the trick. The tectonic shift in consumer behavior toward online shopping was already well underway before the pandemic, but the impact of 2020 will likely lead to permanent changes in shopping patterns that will benefit leading online retailers and digital payment providers.
E-commerce sales in the U.S. grew by 32% in 2020. Three stocks ideally positioned to benefit from the continuation of this trend are Amazon (AMZN -2.56%), Etsy (ETSY -0.86%), and PayPal Holdings (PYPL 0.34%). Here's why these stocks can juice your returns over the long term.
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1. Amazon
It might seem odd that a company that generates $386 billion in annual sales could be described as just getting started, but the accuracy of that description is a testament to the long runway for growth that e-commerce has ahead of it. Amazon's sales growth reached a robust 38% last year, but rapid revenue growth was nothing new for it. Its sales more than tripled over the previous five years. What's more, the business is not showing any signs of slowing down.
Amazon's dominance as an online retailer has led to big opportunities in two other markets: cloud services and advertising services. Amazon Web Services generated $45 billion in sales last year and continues to hold the No. 1 market share spot among providers of cloud infrastructure services.
On the retail side, many third-party sellers are desperate to get exposure to Amazon's more than 150 million Prime members, and they are willing to buy sponsored ad placements to help their products stand out. Amazon includes advertising services in its "other" category, and revenue from that category grew by 66% year over year to $7.9 billion in the fourth quarter.
The company's range of consumer services, including digital entertainment, grocery delivery, and even video games, has given it a powerful advantage, helping to fuel more demand and keep Amazon Prime members engaged. It's pouring billions into expanding its fulfillment network and its data center infrastructure, and given the $31 billion in free cash flow it produced in 2020, it has no shortage of resources to route toward those efforts.
Amazon is one of the best stocks to consider in e-commerce, a market that is still under-penetrated, as it accounted for only 14% of total retail sales in the U.S. in 2020. This online juggernaut has ample room to expand globally and deliver wealth-building returns for investors.
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2. Etsy
While many people bought household goods and groceries from Amazon during the pandemic, millions of shoppers turned to Etsy to shop for personal items, from face masks to hand-made jewelry. Its unique offerings and dynamic marketplace helped it stand out in 2020, leading to gross merchandise sales doubling year over year through the third quarter.
As COVID-19 vaccines roll out, Etsy may have a difficult time maintaining that pace of growth, but improvements to search and the personalization that sellers on the marketplace offer their customers could drive repeat purchases from the recent wave of newcomers to the platform.
Etsy is drilling down on the little things to improve the shopping experience, which management previously credited for its strong performance last year. For example, the company has recently been tweaking the technology behind the website to drive faster page loads. It's also using machine learning to deliver unique search results based on each buyer's search history.
Management believes it has a long runway of growth ahead. Etsy's addressable market is estimated at approximately $100 billion, so with $8 billion in gross merchandise sales over the last four quarters, Etsy should be a much larger and more valuable business in 10 years than it is today.
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3. PayPal
Investing in a digital payments provider is a great way to get broad exposure to the growth of e-commerce without betting on the success of a single retailer or marketplace. PayPal just completed its best year of growth in total payment volume and revenue, and management expects another strong year in 2021.
Retailers are preparing for a digital-first world, anticipating that most consumers will continue to do a large share of their shopping online even after the pandemic has passed. PayPal's reach, with 377 million active customer accounts, makes it a valuable partner for retailers looking to offer digital payment options at checkout.
Last year, PayPal made a huge leap to expand its addressable market with the introduction of its QR code checkout technology. As a result, PayPal has experienced a 19% increase in payment volume from consumers who use its QR codes. This new in-store offering could drive higher engagement levels on PayPal's platform and fuel its momentum for many years.
The world was already in the midst of a major shift toward digital payments before 2020, but nearly half of consumers worldwide plan to use cash less often after the pandemic is over. The rise of digital payments is a megatrend that should deliver many more years of strong growth for PayPal.
