When investors think of groundbreaking technology with the potential for explosive returns, phrases like artificial intelligence, blockchain, and autonomous vehicles enter the mind. However, there's a more accessible technology that has just as much potential to change the business world and deliver blockbuster returns: e-commerce
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Led by Amazon (NASDAQ: AMZN), this industry, which also includes stocks like Etsy (NASDAQ: ETSY), GrubHub (NYSE: GRUB), and Wayfair (NYSE: W) as well as related service providers like e-commerce website facilitator Shopify (NYSE: SHOP) and shipping company XPO Logistics (NYSE: XPO), had a blowout year in 2017 with each of those stocks gaining 56% or more. Investors seem to finally be grasping the opportunity in e-commerce. Here's why you'd be better off with some e-commerce stocks in your portfolio.
1. A huge, long-tail growth opportunity
Few markets have greater potential than e-commerce. U.S. retail sales totaled more than $5 trillion last year, and more than $5.7 trillion when restaurants and bars were included. However, the share of those sales that go to e-commerce is much less than most people think, at just 9%, meaning there's more than $4 trillion in annual revenue that could shift to the online channel in the future. And that $4 trillion opportunity doesn't even account for the rest of the world where the potential for disruption is even greater, especially as technology revolutionizes commerce in developing countries. It's why Amazon has already spent billions to break into the Indian market.
But the shift will continue to be gradual. According to the Census Bureau, annual e-commerce growth has hovered around 15% since the recession, and it seems likely to stay that way as online shopping continues to get more convenient and Americans get more comfortable ordering food from GrubHub on their smartphone, shopping for gifts on Etsy, or taking advantage of Amazon's Prime Now, which promises delivery in as little as an hour.
Some sectors have made the transition faster than others. Books, for instance, were easily disrupted by Amazon back in the 1990s as the category, with its breadth, lends itself well to online shopping; e-commerce has built momentum in apparel in recent years as brick-and-mortar chains have seen traffic decline forcing them to invest in the online channel, but online grocery shopping is still just a sliver of the overall grocery market. Still, titans like Walmart and Kroger have recognized the appeal of the online channel and are investing in pickup stations, and Amazon has its eyes on the segment with its recent purchase of Whole Foods.
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Those upcoming and ongoing transitions as well as new and improving technologies and the desire for convenience will ensure the long tail of growth ahead for e-commerce as it takes an even larger bite out of the $5 trillion American retail market.
2. The winners will outweigh the losers
Like any emerging technology sector, e-commerce stocks carry plenty of risk. Many of these stocks are still not profitable, or only minimally so, and the sector is still fragmented. With Amazon as the 800-pound gorilla in the industry, there will be losers, but investing in a basket of e-commerce stocks will ensure long-term gains. Overstock.com, for instance, perennially struggled to gain a foothold in the industry, but the emergence last year of stocks like Wayfair, Etsy, and GrubHub shows the companies have a viable future ahead.
Investors should also note that the e-commerce space doesn't only apply to retailers. Logistics companies like XPO Logistics, which specializes in last-mile of heavy goods like furniture and appliances, and software providers like Shopify, which helps online retailers manage their businesses, are also key players in the industry. Both have thrived as the two stocks are up more than 300% over the last two years.
Taking the definition more broadly, even Netflix should be considered an e-commerce company as it began life renting DVDs over the internet and now streams movies and TV shows with its entire interface on the web, and Match Group has revolutionized dating and relationships with the internet as its platform.
Many of these stocks have already been multibaggers. Considering that it only takes 100% growth from one stock to balance out a bankruptcy in another, the upside potential in e-commerce clearly outweighs the risk.
3. It's an umbrella technology
Part of the reason why e-commerce has grown so consistently and should continue to do so is that it only gets better as technology improves. The industry that was spawned by the internet has benefited from ever-improving connectivity as the proliferation of mobile phones and smartphone apps have made online shopping easier and faster, and the "sharing economy" it spawned shows a whole different branch of e-commerce. Other technologies on the horizon like autonomous vehicles, artificial intelligence, and even the blockchain all seem poised to drive increased e-commerce adoption. AVs, if they go mainstream, would dramatically lower delivery costs by eliminating the need for a driver. Artificial intelligence is helping companies like Amazon and Walmart install smart locks, allowing delivery drivers to leave packages inside homes, and advances in payment technology through the blockchain could help online retailers save on credit card fees.
Drone delivery, which Amazon has experimented with, is yet another new technology poised to make e-commerce easier and faster.
We don't know how technology will change the world over the next 10 years, but we know that it will. Those advances will only make e-commerce more appealing, driving its growth as online shopping becomes even more convenient.
Investors should take advantage of this long-term trend by grabbing a few of the stocks above, if they haven't already.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Kroger, Match Group, and Netflix. The Motley Fool owns shares of and recommends Amazon, Netflix, Shopify, and Wayfair. The Motley Fool recommends Etsy, Match Group, and XPO Logistics. The Motley Fool has a disclosure policy.