Investors are always searching for businesses that compete in markets that will expand for decades. There's no way to know for sure about these growth niches, of course, but it's a lot easier to increase sales when the industry you operate in is ballooning.
E-commerce is a textbook example of that kind of growth industry. The niche was responsible for just 1% of U.S. retail sales in 2001 and climbed to 12% just before the pandemic struck. The metric peaked at 17% of sales during the worst of the pandemic lockdowns, and it declined through mid-2022 as pandemic pressures eased. E-commerce's share of overall retail sales has now returned to its more normal growth rate, rising in each of the last three quarters. It now accounts for 15% (roughly $4.5 trillion for all of 2023) of all retail sales globally.
Expansions of that magnitude can create many winners. Let's take a closer look at three especially strong e-commerce specialists that deserve a spot on your watch list.
1. Shopify
Shopify (SHOP 1.11%) has clearly put its growth hangover behind it. After slowing for most of the past year, sales gains in Q2 accelerated to a blazing 31% year-over-year rate. Merchants are loving the growing list of business tasks that its platform can handle for them, as evidenced by Shopify's expanding pool of users and its rising subscription and payments processing sales.
The stock's rally in 2023 was partly driven by investor enthusiasm around artificial intelligence (AI) and what that integration could do for Shopify's platform. There are big questions about the long-term return from these investments, but it's safe to assume that AI will boost the value of Shopify's services, as it already has with popular features like its commerce assistant. Combine the company's concrete moves toward profitability, and you've got a recipe for potentially strong shareholder returns over the next several years.
2. Home Depot
It might not show up on many e-commerce stock screens, but Home Depot (HD 0.94%) actually runs one of the busiest digital sales platforms in the country. That's partly thanks to its massive $160 billion annual sales footprint. A cool 14% of that total came from e-commerce sales last year.
The home improvement giant's stock is down this year on worries that higher interest rates will pressure the business in 2024 and beyond. To be sure, revenue is expected to decline slightly in 2023, as shoppers are spending less on big home projects.
But the housing market has a bright long-term future thanks to fundamentals like demographics, rising home prices, and the age of housing stock. Both Home Depot and Lowe's stressed these advantages in their latest earnings updates. Home Depot affirmed its growth outlook at that time while confirming that it expects to generate an over 14% operating profit margin this year. Home Depot's growing dividend will add to those tantalizing investor returns in the coming years.
3. Amazon
Amazon (AMZN 3.43%) has returned to growth in its e-commerce business, which has expanded to $116 billion through the first half of 2023 compared to $113 billion a year earlier. Yet investors have just as much to be excited about when it comes to its cloud services segment. That division jumped to $146 billion from $125 billion and now accounts for 56% of overall revenue.
The biggest knock against Amazon's stock is that it isn't nearly as profitable as big tech rivals like Microsoft. Its operating margin is closer to 5% of sales than Microsoft's over 40% rate, after all.
Recent cash flow trends, plus accelerating growth in the services segment, suggest that Amazon might finally start boosting margins toward double-digit percentages. And with a long runway for growth in massive markets like e-commerce and web services, that success is likely to support much higher annual earnings in just a few years.
