Forget the mall, holiday shopping is going online this year — but plenty of those purchases won’t involve the segment leader.
Oct. 20, 2020
Predictions for total retail spending for the upcoming holiday season are mixed, but one thing is certain: More shopping will be done online than ever before. Amazon is certainly well-positioned to benefit from that, but for some investors, its massive $1.6 trillion valuation is a turnoff. Here are three much smaller e-commerce alternatives that are likely to come out of 2020 as winners for investors.
The coronavirus is fueling e-commerce growth
Deloitte is estimating overall retail sales for the holiday quarter will increase only by 1% to 1.5%, but online sales are expected to increase by 25% to 35% over last year. That points to a massive shift from brick-and-mortar shopping to online for gift-buying, and Shopify (NYSE:SHOP), Etsy (NASDAQ:ETSY), and Mercado Libre (NASDAQ:MELI) and are all poised to benefit.
Shopify’s platform enables businesses of all sizes to start and run e-commerce stores. Etsy’s marketplace provides a popular website for artisans to sell handcrafted goods. Mercado Libre serves over 600 million people in Latin American with e-commerce and payment services.
|TTM platform sales||$89.3 billion||$6.9 billion||$15.9 billion|
|MRQ platform sales growth||119%||147%||102%*|
|TTM revenue||$2.1 billion||$1.1 billion||$2.8 billion|
|MRQ revenue growth||97%||137%||123%*|
|Market capitalization||$132 billion||$19 billion||$63 billion|
E-commerce sales on all three platforms have accelerated to triple-digit growth in the most recent coronavirus-fueled quarter, and will likely carry this momentum into the holiday quarter. Given their e-commerce tailwinds and market capitalizations that are orders of magnitude smaller than the everything-store juggernaut, it makes sense for investors to take a closer look at these three quality operators.
Shopify: An online platform for businesses of all sizes
In the month since the pandemic struck, many small brick-and-mortar establishments have flocked to Shopify’s easy-to-get-started platform to establish themselves as e-commerce operators too. Gaining the ability to reach and serve customers online has enabled these small businesses to survive the current crisis, but those new online shops will likely remain key parts of their businesses even after it recedes. And whether the client is a small farmer or a large national brand like Staples, Shopify’s platform can serve the needs of any size customer.
Shopify takes a markedly different approach to e-commerce than Amazon, and it’s paid off. By focusing on innovations to make its merchant clientele more successful, it has grown its monthly recurring revenues at a 46% compound annual rate over the last five years. Its merchant solutions segment has grown even faster by taking a small cut of each merchant sale and through selling optional services like payments and shipping.
As holiday shoppers look for gift ideas this season that are unique and locally made, Shopify will be behind the scenes, powering the e-commerce sites of its 1 million-plus merchants toward what will likely be record-level online sales.
Etsy: The marketplace for something special
According to a survey of Etsy’s shopper, 88% say that they find items on its website that they can’t find anywhere else. These unique handcrafted and vintage goods come from the 3.1 million active sellers on the platform, many of whom will even personalize items to suit a buyer’s specific requests. Its final quarter last year was its biggest ever to date up to that point, with platform sales growing at 33% year over year to $1.3 billion. But in its most recently reported coronavirus-fueled quarter, it more than doubled that with $2.7 billion in platform sales.
Management expected that momentum to continue into Q3 with 80% to 110% gross merchandise sales growth year over year, ranging from $2.2 billion to $2.5 billion, driving revenue growth of 85% to 115%. The company hasn’t made a public prediction about sales for Q4, but it’s likely to set a fresh record in that period too. Last quarter, the platform attracted 18.7 million new and reactivated buyers who hadn’t purchased anything from Etsy in the previous 12 months, bringing its total active buyers to a record 60 million (a 39% year-over-year gain).
These millions of buyers are likely to come back to Etsy over the next few months to purchase holiday gifts — and even if only a portion of them do, it should make for the company’s best Q4 ever.
Mercado Libre: Latin America’s e-commerce leader
Mercado Libre is the leading e-commerce player in Latin America. In its most recent quarter, it grew new shoppers 75% year over year and its customers are buying more — an average of 5.7 items over the last 12 months — up 30% year over year. Items sold doubled year over year in the five core countries that together account for more than 95% of its revenue. It’s likely that the platform’s convenience and vast selection will bring many of those shoppers back to it when it’s time to hunt for holiday gifts.
It’s also making significant investments in its platform and its logistics infrastructure, which are improving its customer experience scores and allowing it to deliver goods in record time. It now offers free shipping in its core markets, and payment services in those five countries plus two more to more easily facilitate online sales. These improvements are setting the company up for its best holiday quarter ever.
The bottom line for investors
Amazon stock isn’t the only way for investors to capitalize on the growth trends in e-commerce. These three high-quality operations have scaled up to meet increased demand during the pandemic, attracted new customers, and improved their capabilities — all of which has set them up for a revenue bonanza this holiday season.
But a word of caution: Each of these growth stocks is priced at a premium. Etsy is the only one of them consistently posting profits, so the price-to-sales (PS) ratio is the best way to compare their valuations. Shopify, Mercado Libre, and Etsy carry PS ratios of 61, 22, and 17 respectively. Even at these lofty valuations, they are likely to ride the trends to market-beating returns over the long term. With these stocks on a roll, it may be worth it to add shares to your online shopping cart and submit your order before the gift-buying season heats up.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brian Withers owns shares of Amazon, Etsy, MercadoLibre, and Shopify. The Motley Fool owns shares of and recommends Amazon, Etsy, MercadoLibre, and Shopify and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.