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Motley Fool Issues Rare “All In” Buy Alert
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E-commerce boomed at the onset of the COVID-19 pandemic. Multiple years of growth happened in a few months, with in-person stores closed and people quarantined in their homes. This was a boon for e-commerce stocks, with Wall Street and retail investors sending many of these companies to stratospheric heights.
Now, with the world generally back to normal and the e-commerce industry reverting to its long-term trend, e-commerce stocks have performed terribly in 2022, with some down over 50% or worse just this year.
However, as we head into the close of 2022, I believe investors have gotten too pessimistic about e-commerce stocks, presenting a buying opportunity for long-term investors. Here’s why e-commerce investors should buy e-commerce platform companies Amazon (AMZN 1.88%), Shopify (SHOP -4.71%), and Wix.com (WIX -12.42%) in November for great forward returns.
AMZN data by YCharts.
We all know Amazon as one of the first online shopping businesses and now one of the largest companies in the world. It used to have a market cap close to $2 trillion, but in 2022 its stock has fallen on hard times and is down 46% year to date. Today, it has a market cap of “only” $913 billion, with the stock giving up all of its gains from the COVID-19 bull market.
At current prices, I think investors are getting a great deal on Amazon’s e-commerce business when looking at it holistically. Over the last 12 months, Amazon’s traditional online selling business made $221 billion in revenue. This segment has extremely low margins, so investors shouldn’t expect it to generate too much profit compared to that giant revenue base. But its traditional selling business isn’t where Amazon is making money through e-commerce.
So where will all the profit come from? Three areas: third-party selling services, subscriptions, and advertising. Amazon not only sells products on its website and mobile application but also allows other brands to sell on their own Amazon stores while simultaneously getting access to Amazon’s delivery and warehouse network. This segment should have higher margins than first-party sales since Amazon isn’t actually buying and selling the product itself, just facilitating the transaction. Over the last 12 months, third-party revenue was $112 billion and grew 23% year over year last quarter.
Subscription revenue is mainly from Amazon Prime, its free shipping and streaming video bundle. Subscription revenue grew 14% last quarter to $8.9 billion, or $35.6 billion on an annualized basis, and likely brings in very high profit margins for the company. Advertising revenue grew 30% last quarter (outpacing both Google and Facebook), and the segment has done $36 billion in revenue over the last 12 months. If you look at the extremely high margins digital advertising businesses have at scale, Amazon’s advertising business could soon be making $10 billion in profits each year.
On a consolidated basis, Amazon only generated $2.5 billion in operating income last quarter. However, that is because it is investing heavily in numerous growth initiatives like the Alexa voice assistant. The underlying profitability of its e-commerce business, when you include both subscriptions and advertising, is much, much higher than this and makes the stock a buy at its current price.
Another way to invest in e-commerce is to buy the platform that is arming the resistance against Amazon. That platform is Shopify, an e-commerce software and logistics company that helps other businesses easily sell products online. The company makes money through software subscriptions as well as payments that flow through its platform.
Last quarter, Shopify’s revenue grew 22% year over year to $1.4 billion. This is even more impressive when you consider the reversion of e-commerce spending over the last year or so. Its three-year revenue compound annual growth rate (CAGR) is 52%, making Shopify one of the fastest-growing businesses in the world. A lot of this is driven by its payments revenue, where it takes a cut of every transaction that flows through its Shopify Payments service. Last quarter, gross payments volume (GPV) was $25 billion, up from $20.5 billion a year ago.
This GPV growth led Shopify’s merchant solutions segment to grow revenue by 26% year over year to $990 million, making it the majority of Shopify’s overall revenue. Over the long term, higher payment volume flowing through its merchants’ websites should translate to better revenue numbers for this business.
This year, Shopify’s stock is down 75% as the narrative on e-commerce businesses has worsened, even though the company is putting up solid growth numbers. Current prices could provide a buying opportunity for long-term believers in Shopify’s business model.
Another platform e-commerce company that is a competitor to Shopify is Wix.com. The website builder invested heavily in online shopping and payment tools over the last few years, bringing in $9.6 billion in GPV last year.
Wix processes much less in payments volume compared to Shopify and has a smaller market share (6.1% vs. 3.4%) of the website management sector. However, Wix has gained some ground over the last year, with its market share growing from 2.9% to 3.4%, while Shopify’s declined from 6.6% to 6.1%. This is a good sign for the company as more businesses adopt its new e-commerce tools.
If you own Shopify stock and are bullish on individual e-commerce sellers, Wix could be a great way to get even more exposure to the space and diversify your bets. The stock is down 50% this year, even with revenue growing around 10% year over year, making now a great time to scoop up some shares for your portfolio.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Wix.com. The Motley Fool has positions in and recommends Amazon, Shopify, and Wix.com. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
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