Many e-commerce companies experienced massive growth spurts during the COVID-19 pandemic as more consumers shopped online. That acceleration, which coincided with the buying frenzy in growth stocks, propelled many e-commerce stocks to their all-time highs in 2020 and 2021.
But after pandemic pressures eased, those temporary tailwinds faded away and left those e-commerce darlings facing tough year-over-year comparisons. Inflation exacerbated that slowdown by curbing consumer spending while rising interest rates -- which were aimed at taming inflation -- broadly drove investors away from higher-growth stocks.
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That triple whammy of bad news caused many investors to shun most e-commerce stocks. Yet these three bellwethers of the sector -- MercadoLibre (MELI 3.09%), Pinduoduo (PDD 2.80%), and Shopify (SHOP 1.11%) -- still seem like great buys for investors who can tune out all the noise and ride out the near-term volatility. Let's look at why these three e-commerce stocks are great buys in July.
1. MercadoLibre
MercadoLibre is the largest e-commerce company in Latin America. It's active in 18 countries, but it generates most of its revenue in Brazil, Mexico, and its home market of Argentina. It also owns the digital payments platform Mercado Pago, which it integrates into its own marketplace and third-party businesses.
MercadoLibre's revenue surged 73% in 2020 and 78% in 2021. It then suffered a milder post-pandemic slowdown than many of its industry peers: its revenue still rose 49% in 2022, and analysts expect 28% growth in 2023.
MercadoLibre's growth might be gradually cooling off, but it still has plenty of room to expand. According to Americas Market Intelligence, the e-commerce markets of Brazil, Argentina, and Mexico could still expand at compound annual growth rates (CAGR) of 22%, 32%, and 24%, respectively, from 2021 and 2025.
Moreover, MercadoLibre's operating margins more than tripled from 3.2% in 2020 to 9.8% in 2022 as economies of scale kicked in. It turned profitable on a generally accepted accounting principles (GAAP) basis in 2021, and its net profit rose more than sixfold in 2022. Analysts expect its net income to rise 83% this year. MercadoLibre's stock might seem a bit pricey at 66 times forward earnings, but I believe its stunning growth rates and future potential easily justify that higher valuation.
2. Pinduoduo
Pinduoduo is the third largest e-commerce company in China after Alibaba and JD.com, but it's growing faster than both market leaders. It initially carved out a high-growth niche with its sales of discount products across China's lower-tier cities, and it encouraged its shoppers to team up across social media platforms to score steeper discounts on group purchases. It subsequently expanded into the online agriculture market by facilitating farm-to-consumer sales of fresh produce.
Pinduoduo's revenue soared 111% in 2020 and rose 62% in 2021. But in 2022, its revenue only increased by 28% as China's intermittent COVID-19 lockdowns disrupted the economy and curbed consumer spending. On the bright side, analysts expect its revenue to rise 32% this year as China's growth stabilizes in a post-pandemic market.
The bears initially claimed Pinduoduo would never make a profit. But between 2020 and 2022, its operating margin improved from negative 15.8% to positive 23.3% as it phased out its lower-margin first-party marketplace and streamlined its spending. As a result, Pinduoduo turned profitable on a GAAP basis in 2021 and its net profit nearly quadrupled in 2022. Analysts expect its earnings to grow another 13% this year, even as it ramps up its spending on expanding its agricultural platform and Temu -- its new cross-border marketplace which links Chinese sellers to overseas buyers.
Even though it's growing like a weed, Pinduoduo still looks surprisingly cheap at 18 times forward earnings -- presumably because the escalating tensions between the U.S. and China are compressing the valuations of most Chinese stocks.
3. Shopify
Shopify is one of Canada's largest tech companies. Its self-service e-commerce platform enables smaller merchants to create their own online stores, process payments, fulfill orders, and manage their own marketing campaigns. That's an appealing package for sellers who don't want to join a massive third-party marketplace like Amazon.
The rush to sell more products online throughout the pandemic caused Shopify's revenue to soar 86% in 2020 and 57% in 2021. Its non-GAAP net income also jumped 1,332% in 2020 and climbed another 66% in 2021.
But in 2022, Shopify's revenue only rose 21% as its adjusted net income plummeted 94%. Its growth cooled off as pandemic pressures eased, yet it continued to ramp up its spending on its lower-margin Shop Pay payments platform and logistics network. That ugly mix of slowing revenue growth and higher spending rattled the bulls.
However, Shopify reversed course earlier this year by selling its entire logistics division, laying off about a fifth of its workforce, and reining in its other expenses. So for 2023, analysts now expect its revenue to rise 20% as its adjusted EPS skyrockets 725%. Shopify's stock still doesn't seem cheap at 185 times forward earnings, but it's already dropped 60% from its all-time high -- and it could still be a great long-term play on the global e-commerce market.
