Many e-commerce stocks slumped in 2022 as investors reacted to a surprise growth slowdown following pandemic demand spikes. The deceleration came at a terrible time for these businesses, many of which had just committed to huge capital outlays aimed at building up their selling infrastructure.
Fortunately, e-commerce remains a high-growth segment in the wider retailing world, with an attractive long-term profit potential. And some successful businesses in the niche still trade at a discount to last year's prices despite their improving operating trends in 2023.
Chewy (CHWY 2.99%) and Etsy (ETSY 0.34%) stand out as two excellent examples, so let's look at a few reasons to add these stocks to your portfolio today.
Chewy is in growth mode
There was a lot for investors to like in Chewy's late May earnings update. The pet supply retailer posted accelerating sales growth even as industry peers like Petco Health and Wellness complained of a weaker selling environment. Chewy's strong momentum was reflected in metrics like its rising gross profit margin, 15% sales increase, and an uptick in its subscription-based delivery service.
The e-commerce specialist is ready to take its show on the road, too. Chewy is launching in its first international market, Canada, later this year. Management is approaching the expansion with caution, aiming to add no major new cost or profitability pressures as it adds to its addressable market.
That's a goal that simply isn't achievable for its brick-and-mortar peers. And the company's experience here should inform further launches as Chewy works to expand its annual sales base, which currently sits at just over $10 billion. The best news for investors is that while the stock has rallied since late May, it remains well below all-time highs set last year.
Etsy is unique
Investors willing to take on a bit more risk should consider Etsy stock right now. Sure, it is earlier on in its growth journey and it is dealing with more of a growth hangover from the pandemic. Revenue this past quarter rose by just 10% thanks to a slight decline in sales volumes on its platform. Etsy's net profit margin declined to 12% of sales from 15% a year ago.
But engagement is strong on its platform. Etsy returned to growth in its buyer pool even as eBay's comparable metric continues to shrink. Etsy's profitability is being lifted by rising seller fees, too, which are an important part of the long-term investing thesis as the company makes its platform more valuable.
Etsy's last few quarterly reports show that the company has mostly consolidated the huge growth it saw during the pandemic, and now the challenge for the company is to build on those impressive gains. Investors can come along for that ride at an attractive price.
Etsy is currently valued at less than 5 times annual sales, down from a P/S ratio of 8 earlier in the year. Yes, the marketplace business is more exposed to a recession than Chewy, but these cyclical pullbacks are temporary and don't threaten the long-term investing thesis for successful e-commerce stocks like these.
