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2 E-Commerce Stocks You Can Buy and Hold for the Next Decade

By John Ballard - Updated Jun 29, 2021 at 4:36PM

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The recent dip in share price of these two online leaders is a great buying opportunity.

One of the best areas to look for long-term investments is online retail. While some leaders will likely see growth decelerate in 2021 following the surge in order volume during the pandemic, that doesn't mean the e-commerce growth story is over. eMarketer now expects e-commerce sales to make up 15.5% of total retail sales in 2021, an upward revision from the initial estimate of 13.2%. 

The pandemic seemed to lift the plateau for online shopping. Because of that, the post-pandemic environment is a big opportunity for Etsy (ETSY -2.10%) and Chewy (CHWY -4.68%) to win over new customers and deliver market-beating returns to investors over the next decade.  

A customer carrying packages and looking at a mobile phone.

Image source: Getty Images.

Etsy

Etsy continues to be a disruptive force in e-commerce, and its performance during the pandemic shows why. When everyone turned online to shop for goods, Etsy's gross merchandise sales more than doubled the growth of the total U.S. e-commerce market. Revenue grew 111% in 2020 to reach $1.7 billion, which Etsy derives from the fees it charges on each transaction made on the marketplace and for advertising and shipping services.  

"In a time when human connection is so vital, Etsy provides a one-of-a-kind community where sellers are empowered to grow their businesses, reaching buyers who value finding items that express their unique identity, while putting their money where their heart is," CEO John Silverman said in the first-quarter earnings release. 

It will be difficult to maintain this pace of growth coming out of the pandemic. Management's guidance calls for second-quarter revenue to be up between 15% to 25% year over year. But Etsy doesn't need to grow at triple-digit rates to deliver wealth-building returns to investors. 

At a price-to-free-cash-flow ratio of 35, the stock doesn't look expensive relative to long-term growth expectations. Analysts expect free cash flow per share to finish 2021 at $4.97 before growing 25% in 2022 and accelerating by a 32% rate in 2023. These rates are similar to the levels at which it was growing through 2019 and would be more than enough to send the stock higher over the next few years. 

Etsy is also showing a good track record of acquiring other marketplaces, such as Reverb (in 2019) and most recently Depop and Brazil-based Elo7. These could also generate investor returns over the next decade. 

A pet owner working out on the floor and being hugged by a dog.

Image source: Getty Images.

Chewy

Chewy is the leading online retailer for pet products, a large and growing market valued at $98 billion. The company is still a small player with only $7.7 billion in trailing-12-month revenue, but it's taking market share and growing fast. In fiscal 2019, revenue grew 40% before accelerating to 47% in fiscal 2020. 

Chewy is in a great position to grow with pet ownership, which has already increased from 56% of U.S. households in 1988 to 67% in 2020. Its active customer total grew 75% over the last two years to reach 19.8 million in the first quarter. 

What's more, spending per customer is also rising. To help speed this along, Chewy continues to expand into other categories, such as personalized services, healthcare, and better search and discovery features to help customers find the right pet food among its vast selection. 

The stock looks expensive, trading at an astronomical price-to-free-cash-flow multiple of 414. But that's due to high spending to drive growth, such as for advertising, opening fulfillment centers, and expanding selection. However, this business is built to produce plenty of free cash flow down the road. Continued growth in active customers should lead to growing profits, since a customer's second purchase is margin positive to Chewy. 

At a price-to-sales ratio of 4.5, the stock should have substantial upside over the next decade as margin improvement kicks in and Chewy gains market share in the burgeoning online retail market for pet products. 

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Etsy. The Motley Fool recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Etsy, Inc. Stock Quote
Etsy, Inc.
ETSY
$114.45 (-2.10%) $-2.46
Chewy, Inc. Stock Quote
Chewy, Inc.
CHWY
$45.99 (-4.68%) $-2.26

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