It's hard to find a more noticeable shift among consumers in the past couple of decades than the growth of online shopping. The rise of the internet, coupled with the popularity of the smartphone and proliferation of digital payments, has resulted in a completely new industry that has registered rapid gains.
But today, online shopping only accounts for just over 15% of all retail sales in the U.S., leaving plenty of expansion potential as we look ahead. There are many different e-commerce stocks to invest in, so you don't have to pick a single winner. Let's take a closer look at this secular trend.
There's already a winner
There's no need to try to pick a winner because there's already a winner in the e-commerce space. I'm talking about Amazon (AMZN 3.43%), which was a trailblazer and disruptor that went from selling books online in the 1990s to now selling just about everything you can think of. Founder and former CEO Jeff Bezos was convinced early on that the internet was going to have a profound impact on how consumers shopped, and he positioned his business according to this prescient view.
With its online stores and third-party seller services, Amazon generated $85 billion of total revenue in the most recent quarter, which helps explain the sheer size of this company. In August, a whopping 3.2 billion visits were made to the website. According to data provided by Statista, Amazon commands nearly 40% of all dollars spent online in the U.S.
It's hard for rivals to compete effectively with Amazon because of its huge scale and massive logistical footprint. This has resulted in the company being able to ship products at lower costs, an advantage that only becomes better over time.
The added benefit of buying shares in Amazon is that investors will get exposure to other fast-growing segments like Amazon Web Services, the extremely profitable industry-leading cloud division, as well as digital advertising, a rapidly rising revenue generator for the company.
Service providers
It might also be a smart idea to look beyond an obvious business like Amazon and focus on infrastructure service providers. For example, Shopify (SHOP 1.11%) provides various software services that allow merchants to set up storefronts online and start accepting payments.
Fast growth is key to the Shopify story. Revenue of $1.7 billion in the latest quarter (Q2 2023, ended June 30) was 591% higher than in the same period five years ago. The attach rate, a critical metric that measures how much of the gross merchandise volume that happens on the platform the company keeps as revenue, hit a record of 3.04% in Q2. There's still a lot of potential for Shopify to continue expanding.
Etsy (ETSY 0.34%), an online marketplace that matches buyers and sellers, is also a foundational service provider that facilitates e-commerce transactions. Entrepreneurs set up online shops on Etsy to sell special and handcrafted items in a range of different product categories, which has proven to be a success. The company's gross merchandise sales, active buyers, and active sellers in the most recent quarter were up significantly from before the coronavirus pandemic.
What makes Etsy different from a traditional retailer is that it doesn't own any inventory or distribution facilities, resulting in a very capital-light operating model. This is a company that is typically extremely profitable, with the ability to generate sizable amounts of free cash flow. Plus, shares are 78% below their peak price, making now a good time to consider adding the stock to your portfolio.
Gaining broad exposure
If you're an investor who wants to allocate capital to e-commerce stocks, you could do much worse than starting a position in Amazon, Shopify, or Etsy. These growth businesses have all found success by servicing different parts of the industry. Owning all three should give you nice exposure to this powerful secular trend.
