Online shopping gained enormous ground on brick-and-mortar spending over the last two decades, but e-commerce growth seemed to take a pause following the pandemic. A combination of macroeconomic headwinds and the reopening of the economy were too much for leading e-commerce companies last year. But in 2023, e-commerce appears to be back on track.
With top stocks in this space now trading at big discounts to their previous highs, this is a promising sector of the overall market to look for winners in the next bull market.
Here are two top e-commerce stocks that are rising in 2023 and could have more upside.
1. Shopify
Shopify's (SHOP 1.11%) checkout system is everywhere online. Businesses of all sizes rely on its subscription-based platform to set up and manage their online storefronts (as well as some brick-and-mortar parts of their businesses). Shopify makes it easy for any merchant to start selling online, and it's been an incredible growth story in recent years -- but the sell-off in the stock last year is giving investors a great opportunity to score the stock at a discount.
Shopify regularly reported revenue growth of over 40% through 2021. As growth slowed to 16% year over year in the second quarter of 2022, the stock collapsed. But the business is bouncing back as e-commerce recovers.
Greater penetration of Shopify's payments solutions, including Shop Pay, helped push revenue up 25% year over year in the first quarter. The company is also seeing more customers convert from free trials to paid subscription plans, which is boosting top-line growth.
Shopify also started to focus on balancing top- and bottom-line growth. The company is exiting its logistics business, which will free up more capital to invest in merchant solutions and improve profitability. Shopify reported positive free cash flow of $86 million in the quarter, or 6% of revenue. Management now expects free cash flow to be positive for the rest of the year.
Growing revenue and free cash flow are catalysts to move the stock higher over the next few years. The stock already rebounded 87% year to date, but it's not too late to buy shares. Only 15% of Shopify's gross merchandise volume is from international markets. The company has a big opportunity to further help merchants expand globally with its Markets Pro service, which is gaining traction in the marketplace.
2. Coupang
Coupang (CPNG -0.52%) is a leading e-commerce company operating in South Korea that many investors might not be familiar with. The stock is up 11% year to date, but it could be on the verge of a sharp recovery after last year's haircut.
Coupang posted 20% or better currency-neutral revenue growth over the last two quarters. The company's Rocket delivery service, which offers next-day or same-day delivery on a wide selection of products, is a huge success. Like Amazon, Coupang's fast delivery speeds are proving to be a key advantage in helping it conquer an enormous opportunity in South Korea.
Coupang still only controls a single-digit share of the Korean retail market -- a market expected to reach $550 billion in the next few years. "It's hard to overemphasize how staggering the opportunity is before us, and how early we are on this journey," CEO Bom Kim said during the first-quarter earnings call.
The stock looks like a steal. On a price-to-sales (P/S) basis, shares trade at a low multiple of 1.37, which is less than Amazon's 2.45 P/S ratio.
One near-term catalyst that could get Wall Street's attention is improving free cash flow. Coupang reported $451 million of free cash flow over the last four quarters, a $1.5 billion improvement over the year-ago quarter. It demonstrates improving financials while delivering value to customers through its Wow program, where members get free shipping, entertainment, and exclusive discounts. This is clearly a well-managed business.
If you only buy one e-commerce stock, Coupang should be on your shortlist.
