3 Best Stocks to Invest in Internet Retail

By Markets Fool.com

The online retail revolution is here to stay, and it will offer enormous opportunities for investors to profit over the years ahead. Amazon.com , MercadoLibre , and Vipshop Holdings are among the most powerful growth companies in the Internet retail industry on a global scale.

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It's Amazon's world, we are just living in it
If you are looking for the undisputed growth leader in e-commerce, then look no further than Amazon.com. The company comes second to none in market dominance and competitive strength; and this makes Amazon one of the clearest winners in the Internet retail paradigm.

Source: Motley Fool.

Amazon produced a staggering $89 billion in total revenue during 2014, with sales up a vigorous 20% from 2013. The company has 270 million worldwide active customer accounts, and active seller accounts around the world were above 2 million at the end of 2014.

Size is a major advantage in the industry: Buyers and sellers attract each other to the platform, so the bigger Amazon gets the more valuable it becomes for parties at both ends of a transaction. Also, its massive scale provides negotiating power with suppliers, which Amazon leverages to offer aggressively low prices for its products.

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The company is investing tons of money in areas such as building its distribution network, digital content, and its Amazon Web Services cloud computing division. This means profit margins are under pressure, and it's hard to tell how profitability might evolve over the middle term.

With this in mind, Amazon is clearly not the best choice for investors who like stable and predictable earnings. On the other hand, if you are looking for an innovative growth leader with rock-solid competitive strengths in online retail, you would be hard-pressed to find a better alternative to Amazon.com.

MercadoLibre means free market
MercadoLibre means free market in Spanish, and the company is the market leader in Latin American e-commerce. MercadoLibre is in the business of matching buyers and sellers of all kinds of products, including electronics, clothing, cars, and even real estate. In addition, MercadoPago does for MercadoLibre what PayPal does for eBay : It's a digital payment service that has been expanding beyond the e-commerce platform and growing as a stand-alone business opportunity on its own merits.

Source: MercadoLibre.

Importantly, MercadoLibre serves as a commerce facilitator for many traditional retailers by offering its technology and marketing solutions to brick-and-mortar stores. This means the company is in many cases an ally, rather than rival, for big companies in Latin America.

Currency fluctuations and economic instability can be a source of volatility for MercadoLibre; however, its exposure to Latin America also means enormous opportunities for growth on the back of growing e-commerce penetration and increasing demand for online financial services.

Despite heavy currency headwinds, MercadoLibre increased sales by 20% in the fourth quarter of 2014, while revenue in local currencies jumped by an astonishing 109%. Registered users were up 22%, giving MercadoLibre 120.9 million accounts to end the year, while total payment transactions grew 58% to $14.2 million.

There is always the risk of big players such as Amazon and eBay increasing their presence in Latin America. But the local player has the first-mover advantage in the region, a widely recognized brand, and the know-how to serve local customers while dealing with a complex and changing regulatory landscape.

Vipshop Holdings for explosive potential
Vipshop is a Chinese company focused on flash sales of high-quality and popular branded products at big discounts from traditional retail prices. The discount retail channel in China is not as developed as it is in the U.S.; many brands rely on third-party platforms to build their online presence, and the market is highly fragmented.

The company also benefits greatly from the rise of mobile computing in China, as its flash sales business model, which allows customers to act instantly on sales offers at any time and from any place, is particularly well suited for customers shopping via mobile devices.

Source: Vipshop.

Several factors are providing significant structural advantages for Vipshop, and management knows how to translate those opportunities into explosive growth for investors. Total revenue grew 109% to $1.36 billion during the fourth quarter of 2014, while the number of active customers increased 114% to 12.2 million.

Costs as a percentage of sales are declining over time, so profit margins are on the rise and earnings are growing faster than revenue. Income from operations grew 105.7% to $60.8 million during the last quarter. The combination of rapid sales growth and expanding profit margins bodes extraordinary well for Vipshop investors in coming years.

Internet and related technologies are dramatically changing the retail industry. Names such as Amazon.com, MercadoLibre, and Vipshop Holdings are positioned on the right side of the trend, and they offer exceptional growth potential over the coming years.

The article 3 Best Stocks to Invest in Internet Retail originally appeared on Fool.com.

Andrs Cardenal owns shares of Amazon.com. The Motley Fool recommends Amazon.com, eBay, and MercadoLibre. The Motley Fool owns shares of Amazon.com, eBay, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.