Etsy was once considered a promising play on the secular expansion of the e-commerce market. It had carved out a high-growth niche with its focus on custom and handmade products, and it attracted a lot of sellers who didn't want to join a massive marketplace like Amazon or eBay.
But over the past 12 months, Etsy's stock has declined about 40% as its growth has slowed to a crawl. Its revenue only rose 7% in 2023 -- compared to a 10% increase in 2022 -- and analysts expect just a 4% uptick in 2024. Etsy CEO Josh Silverman blamed that deceleration on a "tepid macro climate for consumer discretionary products" during its latest conference call, but the company could also be saturating its niche market.
So instead of betting on Etsy's ability to reignite its growth again, I believe investors should buy these three more promising e-commerce stocks instead: e-commerce services giant Shopify (SHOP 1.11%), high-growth Chinese e-tailer PDD Holdings (PDD 2.80%), and Latin American market leader MercadoLibre (MELI 3.09%).
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1. Shopify
Shopify's self-service e-commerce platform enables businesses to set up their own websites, process payments, fulfill orders, and manage their own marketing campaigns instead of locking themselves into a third-party marketplace like Amazon.
Shopify's growth accelerated significantly throughout the pandemic as more merchants established their own online shops to cope with the closures of brick-and-mortar stores. Its expansion cooled off after the pandemic passed, but it should continue to grow as more businesses set up online stores. Analysts expect Shopify's revenue to increase at a compound annual growth rate (CAGR) of 21% from 2023 to 2026.
Shopify struggled with declining margins over the past few years as it aggressively expanded its first-party logistics network with several acquisitions. However, it returned to profitability in 2023 after it divested its entire logistics unit -- and analysts expect its EPS to rise at a CAGR of 140% from 2023 to 2026.
Shopify's stock isn't cheap at over 100 times forward earnings, but that multiple could contract quickly as its profitability improves.
2. PDD
Pinduoduo parent PDD Holdings became China's third-largest e-tailer after Alibaba and JD.com over the past few years by expanding its discount marketplace and connecting farmers to customers with an online marketplace for fresh produce.
PDD also benefited from China's antitrust crackdown on Alibaba and its own expansion beyond China with Temu, a cross-border shopping app that enables its Chinese merchants to reach overseas customers. Temu is already tremendously popular in the U.S. and Europe, and it could reduce PDD's long-term dependence on China.
Analysts expect PDD's revenue to increase at a CAGR of 47% from 2022 to 2025, which easily beats Alibaba's and JD's long-term growth rates. PDD also turned profitable in 2021 as it phased on its lower-margin first-party marketplace, and it's expected to boost its earnings per ADS at CAGR of 41% from 2022 to 2025. Those are stunning growth rates for a stock that trades at just 20 times next year's earnings.
3. MercadoLibre
MercadoLibre became the largest e-commerce company in Latin America by building a comprehensive logistics network long before its domestic and overseas challengers. It generates most of its revenue from Brazil, Mexico, and Argentina, and its Mercado Pago platform is one of Latin America's most widely used digital payment systems.
MercadoLibre served 218 million unique active users across its e-commerce and fintech platforms in 2023. However, the Latin American e-commerce market could still expand at a CAGR of 19% from 2023 to 2028, according to Mordor Intelligence, while analysts expect MercadoLibre's revenue to rise at a CAGR of 22% from 2023 to 2025.
MercadoLibre has stayed profitable over the past three years as it expanded its higher-margin third-party marketplace, credit business, and advertising platform. Economies of scale also diluted its logistics, payment processing, and marketing costs. That's why it's expected to lift its EPS at a CAGR of 56% from 2023 to 2025.
MercadoLibre's stock might seem pricey at 49 times forward earnings, but its consistent growth, dominance of Latin America's e-commerce market, and the expansion of its fintech ecosystem should justify that higher valuation.
