Despite relatively muted volatility in the stock market recently, the past few years in the market have been emotionally volatile. Given the beatdown growth investors had in 2022, many are now looking for reliable businesses with staying power and long-term growth potential. E-commerce stocks provide strong long-term growth prospects, given the secular trends that have supported the rise of industry juggernauts such as Amazon (AMZN -1.65%) over the past two decades.
Rising stars in this space, such as Shopify (SHOP -2.37%), have grown in popularity as a way for small and medium-sized businesses (SMBs) to thrive in a post-pandemic environment. And a number of emerging market plays in the e-commerce space, such as Chinese juggernaut Alibaba (BABA 0.64%), also provide plenty of growth potential over the long term.
These three e-commerce stocks are among my top long-term picks, as I remain bullish on their potential for years to come. With that said, here's why I think now is a great time for investors to consider adding exposure to each.
1. Amazon
E-commerce giant Amazon is synonymous with the sector. Accordingly, for those looking for exposure to this space, it's probably best to start with the company that has led the e-commerce market for decades.
Amazon's core e-commerce business has become less important to the overall thesis for many growth investors. That's largely due to the incredible growth and profitability shown by Amazon's Web Services (AWS) segment as well as the company's advertising unit. In the company's fourth quarter, growth in these two segments came in at 20% and 19%, respectively. Unfortunately, investors clearly wanted to see more out of these divisions during the past quarter, with the stock trading lower immediately following the report.
That said, the company's core retail business remains a key focal point for long-term investors. On this front, I think Amazon did quite well, considering the weakening consumer and a trade down noted among its consumer base toward lower-priced goods this past quarter. The company's overall retail revenue declined by 2% in Q4 to $64.5 billion, although the services the company offered to third-party sellers surged by 20% to $36.3 billion.
Amazon is a tricky company to assess because, while the majority of its business is e-commerce, it's really a tech giant with profit centers that have nothing to do with its core business. The economies of scale Amazon is able to utilize to produce impressive gross margins could translate into surging earnings if the company chooses to slow its rate of investment (free cash flow has been negative since early 2021).
I'm of the view that Amazon's size, market share, and growth (where it matters) make this e-commerce giant worth buying right now.
2. Shopify
Shopify's comprehensive software solutions, aimed at improving the ability for small and medium-sized businesses to set up online stores, have truly revolutionized the e-commerce sector. In most cases, retailers who wanted to have a shot at reaching a mass-market audience would have previously been forced to set up shop at Amazon as a third-party seller. However, Shopify's technology allows for small businesses to take a direct-to-consumer approach, something that really took off with the onset of the pandemic.
The resulting surge in sales for Shopify led to some rather difficult comps to beat. Shopify's recent numbers have been disappointing, leading to a drop of around 70% in Shopify's stock price since its peak in late 2021. Indeed, many investors seemingly priced in indefinitely sky-high growth rates into Shopify's valuation following the pandemic.
I think there's reason to believe that Shopify could be a great investment moving forward. The strong secular tailwinds that supported the company aren't gone; rather, I think much of the future growth expected by the company had been pulled forward, leading to unrealistic targets being set by analysts and investors of all types.
Thus, for investors thinking very long term about investing in the e-commerce space, Shopify is one stock to own at these depressed levels.
3. Alibaba
Alibaba is another major player in the e-commerce space. However, this China-based conglomerate differs from its two North American peers in more ways than just geography. Alibaba's exposure to a range of sectors, including lending, digital media, and entertainment, is unique. Alibaba's core businesses, which are e-commerce and cloud computing, provide key reasons to include Alibaba on my list alongside Amazon.
After all, I think of Alibaba as the "Amazon of China," and there are plenty of investors out there who agree with this sentiment. Notably, Alibaba's stock price has been hit much harder than Amazon's during 2021 and 2022, primarily due to a government crackdown on big tech from President Xi Jinping.
However, with pandemic restrictions being lifted, the economy reopening, and even signs that Alibaba's ownership position in Ant Financial will be monetized via a highly anticipated initial public offering (IPO), which was shelved after former CEO Jack Ma made some disconcerting comments about the Chinese Communist Party (CCP), there's a lot to like about the company's outlook from here.
Alibaba has rallied significantly from its bottom last year and it has retained some solid momentum at these levels. The thing is, if the company can return to its former growth ways, I think there's plenty more upside to be had over the very long term in this stock.
