Over the last few years, e-commerce has grown to become one of the largest industries worldwide. Analysts expect the category to hit $5 trillion in global spending in 2022 and grow to $6 trillion in 2024, with $1 trillion predicted to be spent just in the United States this year.
With a multitrillion-dollar opportunity that is set to continue growing over the next few years, e-commerce is one of the best places to look for potential new investments. Here are three e-commerce stocks to consider buying right now.
Image source: Getty Images.
1. Amazon
We can't have an e-commerce discussion without including Amazon (AMZN +0.61%). The technology giant is the largest e-commerce company in North America and many international regions, making it one of the top drivers in bringing e-commerce to the masses over the past few decades.
In Q3 2021, Amazon's latest quarterly result as of this writing, online store sales grew 3% year over year to $50 billion. This might seem slow compared to how fast the overall e-commerce category is growing, but if you look at third-party seller services (which is when Amazon facilitates sales for other companies), growth was a lot better. Third-party seller services hit $24 billion in Q3, up 18% year over year.
Even though Amazon has a market cap of $1.4 trillion, it has actually generated negative free cash flow over the last 12 months for a free cash outflow of $2.2 billion. This might seem concerning to investors, but this is because of Amazon's enormous capital investments over the past year. Over the last 12 months, Amazon has spent $57 billion on capital expenditures, up from less than $20 billion a year before the pandemic started.
This one-time acceleration in spending will hopefully lead to a good return on invested capital (ROIC) over the next few years. If so, given the size of this capital spending, investors will be rewarded handsomely once Amazon returns to generating positive free cash flow.
AMZN Free Cash Flow data by YCharts
2. Coupang
Coupang (CPNG +2.32%) is the riskiest investment of the three companies discussed in this article, but it has the highest chance of delivering outsized returns. The company is the largest e-commerce business in South Korea and runs a very similar platform to Amazon. Coupang's biggest advantage is its in-house delivery and fulfillment network, which insulates it from competitors and allows it to offer a better service than anyone else in South Korea right now. This advantage is why Coupang's market share in South Korea has doubled since 2017, hitting 15.7% in 2021.
In Q3, Coupang's revenue hit $4.6 billion, growing 48% year over year. Rapid growth is coming from Coupang's value-added services it is adding to its platform. These include advertising (which tripled year over year), Coupang Eats (food delivery), Rocket Fresh (grocery delivery), and more. With 16.8 million active customers on its platform and its own logistics network, Coupang has tons of optionality that it can add on top of its existing business. This can help lock in more customers with Coupang as well as sustain strong top-line revenue growth for many years.
At a market cap of $32 billion, Coupang trades at a trailing price-to-sales (P/S) ratio just under 2. This might seem cheap, but investors should remember it has very low gross margins of 16% right now, which will likely give the company low profit and cash flow margins once it matures. However, with the growth opportunity in South Korea and across Asia, Coupang can grow its gross profit for many years, making this a perfect stock for investors with a strong appetite for risk.
3. Target
You might not think Target (TGT +0.84%) belongs in a group of e-commerce stocks. Isn't it just a big-box retailer that Amazon is trying to disrupt? Contrary to the popular narrative, Target has built a large, fast-growing e-commerce business that has helped it return to double-digit percentage revenue growth over the last few years.
In Q3 2021, Target's overall revenue grew 13% year over year. This was driven by 12.7% comparable-store sales growth and digital (what it calls e-commerce) comparable sales growth of 29%. What's even more impressive about the e-commerce growth is that it is coming off of 2020, when Target's digital sales grew 155% year over year. Management doesn't share absolute e-commerce numbers, and the company is nowhere near the size of Amazon, but it is clear that Target is a real player in e-commerce in the United States now.
TGT Revenue (TTM) data by YCharts
The digital segment has helped Target regain its overall revenue growth, which had stagnated since coming out of the great financial crisis. On top of the growth, Target has started to expand its operating margin, hitting 8.4% over the last 12 months. These two reversals are key reasons why Target's stock price is up over 200% in the last three years.
At a market cap of $102 billion, Target trades at a price-to-free-cash-flow (P/FCF) of 17. This is below the market average. If the company can continue growing digital sales over the next few years while keeping its profit margin stable, it is likely that Target stock will do well over the next decade.
