During the peak pandemic years, e-commerce stocks could do no wrong. Now, they are entirely out of favor with the market. However, does this weakness present a buying opportunity?

Some of the top e-commerce stocks on my checklist are Amazon (AMZN 0.83%), MercadoLibre (MELI -0.37%), Shopify (SHOP -2.94%), and Etsy (ETSY 1.96%). Each is down significantly from their record highs. While all might be solid companies, are their stocks a buy? Let's find out.

The businesses

Each company operates in its own market niche:

  • Amazon is the world's largest e-retailer and sells practically anything you could ever want. It also has a growing cloud computing business that diversifies the company.
  • MercadoLibre is focused on Latin America and has an e-commerce platform, digital payments business, shipping logistics division, and consumer credit arm.
  • Shopify isn't a direct e-commerce play, but it provides the software necessary for businesses to launch their e-commerce store.
  • Etsy's site offers products that are often customizable and typically sold by individuals with a relatively small operation.   

All four companies saw massive sales growth during the pandemic, but only one has maintained its growth rate through 2022.

AMZN Revenue (Quarterly YoY Growth) Chart

AMZN Revenue (Quarterly YoY Growth) data by YCharts

When the other businesses' sales growth fell dramatically, MercadoLibre's stayed steady at 63%. This was primarily due to 113% year over year (YOY) growth of its fintech revenue during the first quarter. However, its commerce revenue still grew a respectable 44% (which was higher than any of the other companies).

Both Amazon and Etsy had abysmal first quarters, and it won't get better for Etsy. Management projects Q2 sales to rise 7% at the midpoint, a metric that a weakening consumer could impact. Most of Etsy's goods are discretionary and nonessential during tough times. But this sentiment may be baked into the stock, which trades for 20 times free cash flow.

Amazon was propped up by its Amazon Web Services (AWS) cloud computing division in the first quarter as its sales rose 37% over the year-ago period. However, North American commerce sales only rose 8%, while international sales fell 6%. Additionally, Amazon's free cash flow slid further into negative territory, with Amazon burning an astounding $29 billion during the quarter.

Etsy and Amazon both had horrendous quarters, and besides AWS, there doesn't seem to be a light at the end of the tunnel. But what about Shopify?

Those who may not have checked on Shopify's stock lately may be wondering, "Why is this stock priced so low?" As of June 28, Shopify split its stock 10-for-1, which means each share is now worth a tenth of what it used to, but investors who held the stock received nine additional shares to make up for the split.

As for the business, Shopify's sales grew a steady 22%. This rise was driven by a 29% increase in its merchant solutions segment, which takes a cut of each item sold through Shopify's platform. Because Shopify merchants have to pay a monthly fee to use its software, the company should be able to maintain a solid chunk of its business regardless of how the consumer is doing. However, it could see a material slowdown due to the weakening consumer because its merchant solutions made up 72% of Q1 revenue. 

Business outlook

Looking forward, it's hard to get excited about Etsy's growth prospects. It operates in a niche that thrives when the consumer is flush with cash -- something we are not experiencing currently. Amazon's only bright spot is AWS, which has massive tailwinds behind it. As for the e-commerce business, it's almost too big to grow rapidly anymore.

Shopify has a long way to go before fully deploying its vision for a complete e-commerce solution, but many stores have already taken the leap from brick-and-mortar to online with Shopify. Now, Shopify's growth will be driven by the growth of its clients, which could still be significant.

MercadoLibre has by far the best outlook. With its fintech divisions, there seems to be no sign of slowing down. Additionally, only about 4.9% of total retail sales occur online in Latin America versus 16.1% in the U.S. Latin America is home to more than 650 million people, giving MercadoLibre a vast growth runway.

Stock valuations

Comparing each stock directly from a price-to-sales ratio standpoint is dangerous as each has a different margin profile. However, examining where the stocks have traded historically can give investors insight into how cheap they are.

AMZN PS Ratio Chart

AMZN PS Ratio data by YCharts

From this chart, Amazon is returning to valuation levels last seen in 2016. On the flip side, MercadoLibre is valued the same as it was at the depths of the Great Recession. MercadoLibre isn't nearly as in trouble as it was in 2009 when the financial system was on the brink of collapsing. However, that is how the market values it. 

Both Shopify and Etsy are much younger, so investors don't have as much of a historical record on which to base their analysis.

SHOP PS Ratio Chart

SHOP PS Ratio data by YCharts

These two are returning to lows reached in 2016. However, growth prospects were greater back then because e-commerce wasn't as developed. Now that the largest e-commerce catalyst that will likely ever occur has subsided, the future growth story isn't as bright for Shopify or Etsy, leading to a lower valuation.

It's hard to ignore how superior MercadoLibre appears to be as an investment. It's growing the fastest, has a sizable market available, and is valued cheaply. That's not to say it is risk-free since operating in Latin America can be tumultuous with governments and economies.

However, with its wide footprint, it should be able to weather almost any storm it experiences. So of the four, MercadoLibre is my top e-commerce stock to buy, and it really isn't close.