Owning the right e-commerce stocks can create amazing returns for investors. Consider this: Despite two decades of growth, e-commerce still makes up only 15% of U.S. retail sales. But just that small share of the pie has been enough to generate a few trillion dollars in market value for the following companies.
Shopify (SHOP -0.82%), Amazon (AMZN -0.83%), and MercadoLibre (MELI -0.26%) offer investors a combination of growth and value after the market sell-off. Buying an equal amount of all three stocks in a well-diversified portfolio just might be all the e-commerce exposure a long-term investor needs. Let's find out a bit more about these three e-commerce stocks.
More than 2 million merchants across 175 countries use Shopify to process orders and manage their online storefronts. This is more than double the level of merchant users in 2018. As more merchants sign up to use Shopify's valuable selling tools, it has cemented its brand as a go-to checkout solution.
However, difficult year-over-year growth comparisons to accelerated online shopping in 2020 and 2021 have sent the stock price down 75% year to date. While it would have been impossible to continue growing subscription revenue at 70% or more per year, Shopify is still posting solid growth. In the second quarter, total revenue increased 16% year over year, representing a compound growth rate of 53% over the last three years.
Shopify's business was built to serve online merchants, but it's dealing with a new challenge. E-commerce growth has reverted back to pre-pandemic levels, which has forced Shopify to offer point-of-sale solutions for physical stores to maintain growth, but Shopify hasn't missed a beat. Offline gross merchandise volume increased by 47% year over year in the second quarter.
The offline growth suggests that Wall Street is underestimating Shopify's competitive position. The stock's price-to-sales ratio is less than 10, after trading around 50 times sales just a few years ago. It's still not cheap, but I wouldn't call it overvalued either. The stock is trading at a fair price for a leading e-commerce enabler that is proving its brand translates equally well from online to in-store shopping.
Amazon is another top e-commerce stock that is an excellent buy right now. Yes, the tech titan has a gigantic market cap of $1.4 trillion, but Amazon has also nearly doubled its annual revenue over the last three years and generated over $60 billion in operating cash flow during the pandemic.
The size of the global e-commerce market suggests Amazon will keep growing for a long time, and that's where its cash flow power will come in handy. Exiting the tremendous acceleration in demand across retail and its cloud services business during 2020, management substantially raised its capital spending budget last year to expand capacity and get ahead of the demand curve.
Amazon is continuing to stay on offense with its core retail business. The company just signed a deal to sell Peloton's fitness products in Amazon stores. This news is more impactful for Peloton than the e-commerce giant, but the statement from Peloton's Chief Commercial Officer, Kevin Cornils, speaks volumes about Amazon's competitive advantage. In a press release, Cornils said, "We want to meet consumers where they are, and they are shopping on Amazon."
The Peloton partnership sums up why Amazon is the 800-pound gorilla that keeps getting stronger. Wall Street has historically taken a short-sighted view of Amazon's capital spending cycles, but it's an opportunity for investors to buy shares at lower valuation levels. The stock currently trades at its lowest price-to-sales valuation in five years.
One area of the world that investors should not overlook in looking for great e-commerce stocks is Latin America -- one of the fastest-growing e-commerce markets in the world. It's home to 650 million people, which ultimately gives the dominant digital payment provider in the region a market opportunity that is twice the size of the U.S.
MercadoLibre's payments platform, Mercado Pago, reported having 38 million unique active users in the second quarter. While the company facilitated more than a quarter of total online retail sales in Latin America in 2021, it still has a long runway of growth, given there are an estimated 300 million digital shoppers in the region.
With that much headroom, MercadoLibre has had no problem growing. Annual revenue advanced more than tenfold over the last 10 years through 2021, fueling equally impressive returns for shareholders. The only negative is that profitability has been lacking as management prioritizes spending on marketing and technology to expand the business to more users. Still, Mercado offers a variety of services, including payments, credit, and shipping, in addition to an online marketplace that attracts millions of buyers and sellers. With such a valuable ecosystem of services, profit opportunities should be there down the road.
The most important reason to buy the stock right now is valuation. This e-commerce leader is trading at its lowest price-to-sales ratio in more than a decade at just five times trailing-12-month sales.
The market downturn has created great opportunities to buy top e-commerce stocks at attractive prices, which sets the foundation for market-beating returns over the next decade and beyond.