Global e-commerce may be one of the most undeniable trends in investing. Thanks to burgeoning middle classes in developing countries (and the convenience of shopping from home), e-commerce is playing an integral role in the worldwide economy.
As such, buying a basket of these three stocks may offer investors a well-diversified approach (both operationally and geographically) to jump into the $4.9 trillion global e-commerce industry.
With this market expected to grow to $7.4 trillion by 2025, buying this trio for the long term could bring investors multibagger returns.
Image Source: Getty Images.
1. Sea Limited
Operating primarily in Southeast Asia, Taiwan, and more recently, Latin America, multifaceted Sea Limited (SE 3.67%) continued its expansion during the fourth quarter, posting sales growth of 106% year over year. Though the company has three operating segments -- digital entertainment (Garena), e-commerce (Shopee), and digital financial services (Sea Money) -- Sea uses its more established Garena unit to fund faster growth within Shopee and Sea Money.
Despite experiencing rapid sales growth, Sea has seen its stock price crater more than 60% amid the tech stock sell-off and India's decision to ban Garena's top game, Free Fire, due to security issues surrounding customer data.
NYSE: SE
Key Data Points
As the company faces a significant slowdown in its gaming segment due to this ban, investors are worried about Sea's stalling growth from its cash cow. Consider that during 2021, Sea posted negative $594 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), despite Garena's EBITDA of $2.8 billion. In that context, it's a bit jarring to imagine a slowdown from this unit.
While a decrease in cash generation from Garena could be in store for 2022, management expects Shopee and Sea Money to be cash-flow positive by 2025, allowing them to "substantially self-fund their long-term growth." In the meantime, Sea has $9.2 billion in cash versus $3.6 billion in debt to fund its cash-hungry e-commerce and digital finance units.
With management guiding for 76% and 155% revenue growth from Shopee and Sea Money in 2022, respectively, Garena's current woes could soon become just a temporary hiccup against the backdrop of Sea's overall operations.
2. MercadoLibre
Through its core operations in Brazil, Argentina, and Mexico, e-commerce juggernaut MercadoLibre (MELI +0.42%) continues to take Latin America by storm, posting year-over-year sales growth of 78% in 2021. While MercadoLibre may not have a cash-generating gaming unit like Sea, it does have a much more significant financial presence, thanks to its Mercado Pago and Mercado Credito operations.
On the e-commerce front, the company posted a splendid 32% increase in gross merchandise volume during the fourth quarter but has seen its share price drop roughly 50% in the last six months.
NASDAQ: MELI
Key Data Points
Aside from the overall growth stock sell-off, the market has become increasingly wary of MercadoLibre's $1.7 billion credit portfolio, which grew 253% last quarter. This credit portfolio comprises loans to merchants, consumers, and its budding credit card operation.
Consider that as of the same period in 2020, 18% of this portfolio was past due -- a figure which grew to 24% in the latest report -- and it's clear why there are concerns around MercadoLibre's financial well-being. However, MercadoLibre's financials appear relatively healthy with a low net debt balance, positive free cash flow, and operating cash flow just shy of $1 billion in 2021.
Meanwhile, Mercado Pago, its fintech unit, posted total payment volume growth of 73% in the fourth quarter and now has over 34 million active users. Thanks to this growth, MercadoLibre's fintech business now accounts for more than one-third of its overall sales, offering promising optionality to investors.
3. Coupang
Boasting 18 million active customers from a total pool of 37 million online shoppers in South Korea, Coupang (CPNG 1.47%) has quickly become the dominant e-commerce force in its home country. Riding the success of its rapid ascension in South Korea, Coupang went public in early 2021 but has seen its share price drop over 40% since the IPO.
NYSE: CPNG
Key Data Points
With worker safety fears stemming from a fulfillment center fire and the company's ongoing trade-off between profitability and investing for the future, the market has seemingly taken a wait-and-see approach to the stock.
However, this view on Coupang may be shortsighted as it has now recorded 16 consecutive quarters of 20% or higher active customer count growth. Furthermore, its revenue grew 34% in the fourth quarter to $5.1 billion, giving the company a $20 billion annual run rate to compare against a market capitalization of roughly $36 billion as of this writing.
On top of that, of Coupang's 18 million active customers, nine million are already paying WOW members, a unique offering that provides benefits like free shipping, free 30-day returns, unlimited video streaming, and other value propositions. At the cost of roughly $4 per month, this amounts to over $400 million in additional cash flow to fund Coupang's operations every year.
Thanks to this large (and growing) membership base and South Korea's high population density, Coupang makes for an excellent investment to hold for the next decade and beyond.
