The rise of e-commerce has been a nightmare for big-box retailers. Stores became massive showrooms for online purchases, and mobile price comparison apps forced retailers to match online prices. A wide variety of home delivery options also threaten to reduce foot traffic in stores.
However, investors can profit from the growth of e-commerce by investing in the right stocks. Let's look at three companies -- Amazon.com (NASDAQ:AMZN), Petmed Express (NASDAQ:PETS), and PayPal -- that might be good long-term investment opportunities based on the growth of e-commerce.
Amazon.com: The 800-pound gorilla
Amazon, the 800-pound gorilla in e-commerce, has an uncanny ability to grow its ecosystem beyond online retail. In 2007, it introduced the Kindle, which streamlined the book delivery process with e-books. In 2011, it turned the Kindle into a color tablet with the Kindle Fire, which enabled the delivery of streaming video and music to customers.
Amazon sells its Kindle devices at thin margins to tether users to its product search ecosystem for physical and digital goods. It expanded that strategy with the Fire TV set-top box, Fire TV Stick, and the Fire Phone. With Prime, its $99 per year membership service, customers get free two-day shipping, exclusive discounts, free streaming of media content, free e-books from the lending library, unlimited cloud storage for photos, and other perks.
That clever combination of cheap electronic devices and Prime membership has considerably boosted Amazon's sales per customer. A CIRP survey last year found that Kindle owners spent 30% more per year at Amazon than non-Kindle owners, while Prime members spent twice as much as non-Prime members. As Prime gains more users and Amazon unveils new "smart home" products -- such as the Echo speaker and Dash bar-code scanner and buttons -- it will widen its defensive moat against ecosystem rivals such as Google.
Petmed Express: A niche income generator
Petmed Express, also known as 1-800-PetMeds, is an under-the-radar niche player in e-commerce.
The company is the largest pet pharmacy in the U.S., and generates its revenue from over-the-counter and prescription drugs. The company has an extremely loyal customer base -- last year, 83% of its revenue was generated by reorders. It sells 80% of its products online, and ships 80% of those products within 24 hours. The other 20% of Petmed's products are sold through contract centers.
Although Petmed Express has a first-mover advantage and a loyal customer base, it faces fierce competition from larger companies such as Amazon, Wal-Mart, Petco, and PetSmart. Since Petmed doesn't have a substantial price advantage over those rivals, its top and bottom-line growth could slow as those retailers sell more pet medications. That's why Petmed's revenue slipped 1.7% annually last year as net income fell 2.9%.
On the bright side, the average size of individual Petmed orders has been rising, due to a mix of higher-priced products and higher doses, and the company is protecting its bottom line by reducing operating costs. It also pays a hefty forward annual dividend yield of 4.3%, making it one of the highest-yielding e-commerce stocks on the market.
PayPal: A pure play on online payments
PayPal, which eBay (NASDAQ:EBAY) acquired for $1.5 billion in 2002, will soon be spun off in an IPO, which would make it a pure-play investment in online payments. Forrester Research estimates that the amount spent on U.S. mobile payments annually could rise from $12.8 billion in 2013 to $90 billion in 2017.
Last year, PayPal's revenue rose 19% annually, accounting for 44% of eBay's top line. By comparison, revenue at the Marketplace unit, which generated the rest of eBay's revenue, only rose 8%. PayPal's total payment volume surged 27% to $48.3 billion, and roughly a third of those transactions were made via mobile devices -- compared to just 1% in 2010.
PayPal was originally used for email payments, but the service is now employed by third-party websites for online payments and reaches brick-and-mortar stores through payment kiosks, Bluetooth beacons, physical cards, and card-swiping dongles. eBay also acquired Braintree, the maker of peer-to-peer payments app Venmo, to bolster PayPal's mobile presence. In addition, PayPal recently became a payment option for Bigcommerce's e-commerce network of over 90,000 online retailers.
Despite those strengths, PayPal faces intense competition from rivals including Apple Pay, Google's Android Pay, and Amazon's own payments platform for third-party websites. Facebook and Twitter's new mobile payment systems could also challenge PayPal in peer-to-peer payments.
The key takeaways
Amazon, Petmed, and PayPal offer three different ways to invest in e-commerce -- through an established market leader, a niche income generator, and a pure play on online payments, respectively.
However, investors shouldn't overlook their weaknesses. Amazon has great top-line growth but inconsistent profitability, while both Petmed and Paypal face intense competition from larger rivals. Nonetheless, investors interested in e-commerce should look at all three stocks.
Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends Amazon.com, Apple, eBay, Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Amazon.com, Apple, eBay, Facebook, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.