E-commerce companies offer a potentially lucrative area for investors. The segment was steadily growing its share of overall sales and then got a burst of growth at the pandemic onset when folks looked to avoid physical stores. The trend is unlikely to reverse, and e-commerce sales are estimated to continue taking a more significant percentage of overall sales in the long run.
That being said, two stocks that are likely to provide solid returns to investors in that environment are Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY).
Amazon is growing revenue faster
Global behemoth Amazon is growing revenue rapidly and efficiently. Over the last decade, Amazon has grown revenue at a compound annual rate of 27.3%. That took revenue from $48 billion in fiscal 2011 to $386 billion in 2020. What’s more, the business is growing efficiently, and operating income in that same time increased from $862 million to $22.9 billion, increasing the operating profit margin from 1.8% to 5.9%.
One of the main drivers of efficiency for Amazon is skillfully adding fulfillment capacity. As you can imagine, adding warehouses near customers can reduce shipping time and the costs of shipping. However, in the near term, when it spends to build a new fulfillment center, Amazon has to spend on building, hiring, and training staff, and it takes time to get it all up and running. Over time, those investments have paid off, leading to an expanding operating profit margin.
In the last four quarters, Amazon has hired more than 450,000 employees. That’s impressive considering the widespread complaints from businesses saying they can’t find enough workers to fill open jobs. That means Amazon will likely be more competitive in its order fulfillment in the near term, which could make the difference between making the sale and losing a sale to a competitor.
That speed of delivery might be an insurmountable competitive advantage. It won’t be easy for other e-commerce companies to match the speed and convenience Amazon offers.
eBay has higher profit margins
eBay is another e-commerce company poised to do well for shareholders. The company operates on a different business model than Amazon. Mainly, it takes an asset-light approach by leaving shipping and handling to sellers and buyers to determine. That relieves the need to operate expensive fulfillment centers. eBay maintains a platform where buyers and sellers meet, and eBay takes a percentage of each transaction as a fee for its service.
The decision has had the desired effect. While Amazon is increasing its operating profit margin, it is still nowhere near the level eBay produces. In fiscal 2020, eBay’s operating profit margin was 26.4%, while Amazon’s was 5.9%.
Similar to Amazon, eBay could do well against competitors during supply chain disruptions. First, it will not endure higher shipping expenses because it leaves that up to sellers. Second, in times of short supply, eBay benefits because resellers flood its platform with products that are out of stock at popular retailers and sell them at a markup. That phenomenon is likely to be prevalent for the next few quarters as the world grapples with shortages caused by the pandemic.
eBay and Amazon stock are inexpensive
Both eBay and Amazon have excellent near-term and long-term prospects. To make matters better for investors, they are trading at relatively inexpensive valuations.
Amazon is trading at a relative discount to its forward price-to-earnings ratio of close to 100 late last year. And eBay is selling at nearly one-third the forward price-to-earnings ratio of Amazon. Given that they are generating healthy profits, have solid short-term and long-term prospects, and have relatively inexpensive valuations, eBay and Amazon are two e-commerce stocks that investors should consider buying right now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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