The shift to a digital economy represents a challenge for some companies but abundant growth opportunities for those with the right technology and business strategy. It’s estimated that global retail sales will rise by about 4.5% per year over the next four years, with most of the incremental dollar increase being driven by online sales. Global e-commerce sales are expected to climb 20.7% this year to reach $3.535 trillion, according to eMarketer…
1. Amazon: The online retail titan still has plenty of growth ahead
As dominant as Amazon.com has become over the last 10 years, it still has a lot more left in the tank for investors. Consider that Amazon’s trailing-12-month revenue, excluding its cloud business, is only 6.9% of global e-commerce sales. Amazon still has a lot of opportunity to not only ride a fast-moving tide but also gain more wallet share of consumers around the world.
Consistent with its DNA, Amazon is staying aggressive to win customer loyalty. Its latest move is to transition from two-day to one-day delivery for the more than 100 million customers who are Prime members.
One-day delivery will go a long way to growing sales, but one-day fulfillment is expensive for Amazon. Profits plunged 26% year over year last quarter, as the company picks up the tab to get customers’ orders to their door one day faster.
However, history shows that when Amazon invests more in its business, it gets more back in return. Over the last decade, the company has significantly ramped up capital spending, but revenue has increased more than tenfold, and free cash flow has soared nearly sevenfold. The growth in free cash flow and net income has helped fuel a rapid rise in the stock price over the last five years.
Amazon has a massive opportunity to grow in e-commerce, a lot of cash to invest, and more revenue and profits to gain over time.
2. Shopify: Earn a royalty off millions of online transactions
Shopify has been one of the top-performing e-commerce stocks over the past few years. If you had invested $10,000 in Shopify at its IPO price in 2015, you would already have $123,000. Businesses of all sizes are rapidly adopting the company’s range of software and checkout solutions that help merchants get up to speed with the digital economy.
Shopify now has more than 1 million merchants who take advantage of its services, including payments, shipping, and fulfillment. In the third quarter, revenue soared 45% year over year, with strong growth across subscription solutions and merchant solutions.
The knock against Shopify is the lack of profitability, but I don’t see that as a concern at this early stage of the company’s growth. It appears management is being responsible with its spending. Free cash flow has generally hovered right below breakeven. Plus, management credited its third-quarter growth to its international expansion efforts. Shopify also continues to invest in new features to enhance the platform for merchants.
Given the rapid rise in the stock, there is a debate about whether Shopify is overvalued. When you consider that Shopify’s trailing-12-month gross merchandise value is only 1.5% of the $3.535 trillion e-commerce market, it’s clear this company will be growing for a long time. The company’s current market capitalization (total shares outstanding times the stock price) of $37 billion looks small relative to the total size of e-commerce sales. For those reasons, I believe the stock still represents a good investment for the long term at current levels…
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