- Although growth in the category has slowed down, e-commerce remains a growth industry and will continue to take market share from brick-and-mortar retail.
- E-commerce stocks like Amazon and Shopify have been some of the top-performing stocks on the market. The industry creates opportunities for explosive stocks because of its large addressable market and potential for disruption.
- Companies like MercadoLibre, Sea Limited, and Coupang have shown there's still a long runway for e-commerce growth in international markets.
Risks:
- Pure-play e-commerce stocks have a history of being unprofitable or struggling to turn a profit due in part to expenses like logistics and investing in growth.
- Some e-commerce stocks like Etsy (ETSY -0.78%), Chewy (CHWY +1.82%), and Wayfair (W -3.55%) soared during the pandemic, but have struggled since then. The pandemic led some e-commerce companies to over-invest, and they couldn't cover their costs once the economy normalized.
- Competition from Amazon has been a risk for both brick-and-mortar retailers and e-commerce companies.
- The market is maturing, and brick-and-mortar companies have improved their e-commerce operations, meaning that growth will be harder to find.
What to look for when investing in e-commerce companies
E-commerce investors should pay attention to certain metrics and factors with e-commerce stocks. Those include:
- Growth rate: Most e-commerce stocks are still growth stocks, so maintaining a high growth rate, ideally of 20% or better, is key to the stock's future. You'll also want to keep an eye on growth in the company's gross merchandise value (GMV), the total value of goods sold on an e-commerce platform.
- Business model: There are different kinds of e-commerce businesses. The two primary ones are direct sales and marketplace. Some companies, like Amazon, operate as a hybrid. It's important to understand the business model that the company uses since that will affect its financial outlook. A direct, or first-party sales, company will have much higher revenue than a marketplace, though a marketplace should have higher margins. Other business models in the e-commerce space include software, and some logistics companies have exposure to e-commerce.
- Take rate: This is the percentage of GMV that is converted into revenue. It only applies to the marketplace, but it's an important metric to follow since it shows how efficient or inefficient a business is at monetizing income.
- Operating margin: profitability is key for any company, and that is especially true in e-commerce. Some stocks have emerged as profit machines after years of losses; others, like Wayfair, have struggled. Revenue growth or billions of dollars in revenue don't necessarily signal a healthy business without a profit.
- Competitive advantage: Competitive advantage isn't quantifiable, but it's worth assessing in e-commerce. Many e-commerce stocks tend to be category leaders, like Wayfair for home furnishings and Chewy for pet products. It's worth considering concepts like brand strength and barriers to entry when assessing an e-commerce company's competitive advantage.
Are e-commerce stocks right for you?
E-commerce stocks offer a lot of upside potential for investors, but they come with risks. Many e-commerce companies aren’t profitable, and even the ones that are profitable generally have only minimal profits. The hangover in the sector from the pandemic recovery has abated, but the sector is unlikely to return to its pre-pandemic growth rate as a whole.
Investors should be aware that e-commerce is riskier than most stock market sectors, but the track record of these stocks shows that just one successful e-commerce stock can deliver life-changing returns.
