Benefits and risks of investing in e-commerce stocks
Like any other subset of stocks, there are both benefits and risks in e-commerce stocks. Let's take a look at some of the bigger ones:
Benefits:
- 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 +3.01%), Chewy (CHWY +2.00%), and Wayfair (W -0.22%) 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.
Methodology: how these stocks were chosen
These five stocks are mostly top performer over their histories. Amazon, Shopify, and MercadoLibre have all delivered huge returns since they went public, and Walmart has done the same over a longer time frame.
Coupang is the exception in the group here, but its business model is similar to that of older, more successful e-commerce stocks like Amazon and Shopify.
All five of these stocks have also built significant competitive advantages through assets and strategies like infrastructure, memberships, cross-segment benefits, product offerings, and brand.
Unlike physical retail, e-commerce has become a winner-take-all market, and successful e-commerce companies have had to establish themselves as leaders in a market segment or region. That includes Amazon in mass-market products, Etsy in handmade goods, Wayfair in home furnishings, and companies like MercadoLibre, Coupang, and Sea Limited in various regions around the world.
Investors should look for e-commerce stocks that are market leaders with well-established economic moats, including the five stocks above.
