With hundreds of options to choose from in equity markets, it can sometimes be challenging to separate the wheat from the chaff. However, some corporations appear attractive enough that investing in them almost seems like a no-brainer.
In my view, that description applies to Amazon (AMZN 1.26%) and Shopify (SHOP -2.71%), two e-commerce leaders. These companies have historically crushed the market over the long run, and they should continue doing so through the next decade. Here is why.
Image source: Getty Images.
1. Amazon
Amazon's e-commerce business might be the first thing that comes to most people's minds. It is one of the pioneers in the field and one of the most visited websites globally. But while this part of the company's operations generates significant revenue, its biggest sources of operating profits lie elsewhere.
Its cloud business, Amazon Web Services (AWS), as well as the company's advertising platform, are doing much of the heavy lifting on that front. As AWS and advertising capture a larger percentage of the company's sales, it will have a positive impact on its profits. These two segments have been growing faster than the rest of the company's business for years.
Earlier this year, the tech leader reported that its advertising business' annual run rate had more than doubled in the past four years and ended 2024 at $69 billion.
Meanwhile, AWS remains the leader in cloud computing. And thanks to a rapidly growing suite of artificial intelligence (AI) offerings, it is only getting better. CEO Andy Jassy has said that the AI and cloud computing businesses are both in their early stages, yet they are already contributing billions to the company's sales.
That's before we explore other growth opportunities the company could capitalize on, especially its promising ventures in the healthcare sector. Amazon has a culture of innovation, generates significant cash flow, and has more than 200 million Prime members whom it can monetize in various ways.
All of these make its prospects incredibly bright. There will be headwinds, such as competition in cloud computing, with some of the company's challengers, like Microsoft, slowly catching up to it.Amazon's AWS and advertising businesses could also suffer if there is an economic downturn. Still, the company has performed well over the long run, despite these competitive threats.
Thanks to a wide moat stemming from switching costs and network effects, it should remain a leader in its most important markets. The stock looks likely to beat Wall Street in the next decade despite its challenges.
2. Shopify
Shopify helps merchants create sophisticated online storefronts. In today's world, that's almost a necessity, whether a company is primarily an online business or not. And Shopify renders the task easier while offering a suite of valuable services.
One of its greatest strengths is its app store, which provides thousands of options that enable merchants to customize their storefronts in any way they see fit.
Another perk the company offers is the ability to market and sell products across major social media websites. Shopify is a leading player in its niche of the e-commerce industry. It has captured more than 12% of the U.S. market by gross merchandise volume.
How might things evolve in the next decade for the company? My view is that there is tremendous whitespace for it to exploit as retail transactions continue to switch to online channels. We haven't yet reached peak capacity in that department. That's why analysts continue to predict that the market will grow rapidly for the foreseeable future.
This expansion should create a greater demand for the types of services Shopify offers. Furthermore, the company benefits from switching costs as well, since merchants are less likely to switch to a competing provider after investing time, money, and energy into building a website for their businesses with Shopify.
One potential risk investors should consider is that Shopify still isn't consistently profitable. That could be especially problematic in times of significant market volatility and uncertainty. Even so, Shopify has modestly improved its margins and free cash flow over the past few years after making key changes to its business.
SHOP Gross Profit Margin (Quarterly) data by YCharts.
The company should become profitable within the next few years. So investors should overlook the red ink and focus on Shopify's excellent prospects that could lead to superior returns through 2035.
