Top E-Commerce Stocks to Buy in 2019

There's no question that e-commerce has been a rewarding sector for investors. The best of these companies have delivered blockbuster returns, and that pattern is likely to persist as we do more of our spending online.

Driven by faster delivery and increasing convenience as companies like Amazon strive to make the e-commerce process as seamless as possible, we've grown accustomed to shopping from our homes, or anywhere else, through our laptops or smartphones. Shopping online for books and electronics has been common for years, but more recently consumers have embraced e-commerce for things like clothes, groceries, and restaurant takeout.

Why invest in e-commerce?

E-commerce -- short for "electronic commerce" -- is online retail. If a company's primary business involves selling goods over the internet (either directly or through a marketplace) or, more broadly, facilitating e-commerce transactions (with software, payments, or logistics), it can be considered an e-commerce stock.

There are a number of reasons to consider owning e-commerce stocks. Foremost is that the sector has a huge growth opportunity ahead, as retail sales in the U.S. (including food service) total about $6 trillion annually -- and virtually anything can be sold over the internet. Currently, e-commerce makes up less than 10% of total retail sales, at about $514 billion in 2018. The e-commerce sector has also consistently grown by about 15% per year since the financial crisis, and should continue to grow at that pace as online retailers keep finding new ways to make delivery faster and more convenient. Meanwhile, more consumers are discovering the advantages of shopping online and growing accustomed to it.

What's the risk of investing in e-commerce?

Faced with the rising threat from online-only retailers, brick-and-mortar chains have stepped up their web-based offerings by lowering free shipping minimums, speeding up delivery, and giving shoppers options like in-store pickup that online retailers can't match. In other words, physical retailers are doing their best to leverage their real estate as an advantage in the retail wars, as many weaker competitors have been forced to close stores.

E-commerce also tends be less profitable than traditional retail. Though online retailers can avoid store-based costs like rent and staffing, it's difficult to generate a profit selling on the internet, thanks to factors like the cost of shipping and handling returns, expenses for marketing through tactics like paid search, and steep price competition online.

For investors, e-commerce stocks tend to be pricey, like most tech stocks, because of their sales growth and potential earnings growth. Therefore, a bear market or a recession would also be unkind to many e-commerce stocks.

How should I analyze e-commerce stocks?

Like any other sector, e-commerce comes with its own set of metrics to pay special attention to:

  • Revenue growth is generally the most important metric. Considering that the broad e-commerce category in the U.S. is growing by 15% a year, you'll want to look for e-commerce stocks with revenue growth of 20% or better. Not only does that show they're outperforming the sector today, it also suggests their potential for long-term growth. Investors have been willing to extend high valuations to e-commerce stocks with strong sales growth despite little or no profit, because they consider fast revenue growth a priority while the sector is ripe for expansion.
  • Gross merchandise volume (GMV), also known as gross merchandise sales (GMS), is a key metric for e-commerce marketplaces like eBay and Etsy. GMV measures the total sales made on a company's platform, including third-party vendors, and it can be a better indicator of performance than revenue because it's not as easily manipulated. It also shows the popularity of a marketplace in a way that revenue doesn't capture. For marketplace operators, revenue makes up only a small percentage of GMV, and it goes beyond sales commissions charged to other services like payments, promotion, or even shipping. Since GMV is the ultimate driver of performance, it's a better metric to watch.
  • Profit margin is also important to keep an eye on. Though e-commerce companies often have narrow profit margins, if any, investors want to see at least a path to profitability. For this reason, it's also worth noting the percentage of revenue spent on sales and marketing. Companies often spend aggressively here while they are in a high-growth phase, and those additional marketing costs have the effect of making their bottom lines worse than if they were more mature and spending less to drive top-line growth.

What are the best e-commerce stocks for 2019?

So you're looking for e-commerce companies with strong revenue growth and a path toward (greater) profitability, and ideally you want to see companies that benefit from a unique strength or a competitive advantage in their industry. With that in mind, the chart below shows five e-commerce stocks to consider for 2019.

Let's take a closer look at what each one has to offer.

Why you should invest in

Any discussion of e-commerce, or even of the greater retail industry, is incomplete without mentioning Amazon. Born at the same time as the World Wide Web, the company did more than any other to pioneer e-commerce, growing from an online bookseller to the behemoth it is today. As a stock, Amazon's success is self-evident. Since its 1997 initial public offering, shares have returned more than 84,000%, making it the market's best performer over the last generation. At a few points this year, Amazon has been the most valuable company in the world:

Amazon's stock has pulled back since its peak of around $2,050 per share last year, trading down about 14% from that all-time high, which makes now an appealing opportunity to pick up shares. But there are several additional reasons to pick up shares of the e-commerce giant.

After years of focusing on revenue growth and building out a formidable network of competitive advantages -- including its unmatched product selection, Prime loyalty program, and third-party marketplace and fulfillment business -- Amazon is now reaping the rewards. With annual revenue reaching $233 billion a year, making it one of the biggest U.S. companies by sales, Amazon is shifting toward profit growth. Its e-commerce ecosystem is generating higher profit margins in North America thanks to the growth of higher-margin marketplace sales and the stickiness of Prime.

In addition, the company has ramped up its advertising business, taking advantage of the popularity of its website and vendors' demand to make sales on Amazon. Digital advertising is a high-margin business, having generated billions in profits annually for online ad leaders Alphabet and Facebook; its growth should also help Amazon, which has already become the third-largest digital advertiser.

Finally, the company's cloud computing division, Amazon Web Services, remains a juggernaut. Not only is it the most-used enterprise cloud provider in the world, but it's also growing quickly and putting up fat profit margins, with 47% revenue growth last year and an operating margin of 28.4%. As that segment takes up a greater share of Amazon's overall revenue, the company will also grow more profitable.

As a result of those shifts, Amazon's profits jumped 273% in 2018 and should continue to ramp up in 2019. Though the company currently trades at a lofty price-to-earnings ratio of around 88, compared to 21 for the S&P 500, that valuation seems more than justified based on its network of competitive advantages and expanding profitability. Amazon looks like a good bet to outperform the broader market once again this year.

Why you should invest in Grubhub

Another e-commerce company with fast growth and an impressive set of competitive advantages is Grubhub, the leading online marketplace for restaurant takeout and delivery. Grubhub has been growing quickly by adding users to its existing platforms and markets, expanding into new markets, and making acquisitions, which included Seamless, Eat24 (from Yelp), and LevelUp. It's also forged partnerships with restaurant chains like Yum! Brands and Jack in the Box.

Revenue jumped 47.5% in 2018, driving earnings per share (adjusted for share-based compensation and one-time items) up 38% to $1.66. Other key metrics are growing quickly as well: Active customers rose 22% on a year-over-year basis to 17.7 million; daily average orders increased 31% to 435,900; and gross food sales (the company's version of GMV) were up 34% to $5.1 billion. Because of its marketplace model, Grubhub is able to generate wide margins, with an adjusted profit margin of 15.2% last year, and those should expand as the company gets bigger. More than 20% of Grubhub's revenue currently goes to sales and marketing costs.

Grubhub faces ample competition in its industry, from UberEats, Postmates, and DoorDash, among others. But the company has managed to maintain its lead through acquisitions and strategic partnerships, and by investing in making payments and delivery easier for restaurants and customers to handle.

The competition in the sector isn't surprising. Online restaurant takeout is growing at a healthy pace, driven by its embrace by millennials, improved technology, and the popularity of the "stay-at-home" economy -- consumers can now take advantage of services like online shopping and video streaming without having to leave their house. Meanwhile, more restaurant chains are embracing delivery. According to industry research firm Technomic, restaurant delivery is expected to grow 12% annually over the next five years.

Grubhub claims that its biggest competitor is not another online service, but paper menus, saying the vast majority of restaurants still rely on offline ordering. In other words, there should be a long tail of growth ahead for Grubhub as it continues to take share from traditional offline ordering methods.

Like Amazon, Grubhub is trading at a discount from its peak last year; the stock has fallen nearly 50% from its all-time high. However, that sell-off seems overdone, as Grubhub recently traded at a reasonable P/E ratio of 42.6. Analysts are also expecting the company's profits to decline modestly this year with increasing competition from UberEats and DoorDash, potentially giving the stock a low bar to hop over in 2019.

Why you should invest in XPO Logistics

Not every e-commerce stock sells products directly to customers or engages with consumers at the retail level. XPO Logistics, a provider of freight, transportation, and logistics services, is one example of a stock that can provide exposure to different elements of the e-commerce industry.

XPO differs from traditional package-delivery companies like FedEx, United Parcel Service, and even the U.S. Postal Service: It specializes in last-mile delivery of heavy goods, like furniture and appliances, as well as less-than-a-truckload deliveries suited to small e-commerce shippers. Retailers like Amazon, Wayfair, Home Depot, and IKEA count on XPO for delivery, and XPO gains valuable data that it uses in partnership with retailers to help them with things like locating new fulfillment centers.

XPO has grown rapidly in recent years thanks to a series of acquisitions -- including trucking companies, logistics services, and freight brokerages -- that have given it a unique set of assets in logistics and e-commerce. The company sees its scale, end-to-end supply chain, and technology as its biggest competitive advantages. It has been aggressively investing in technology, spending upwards of $450 million a year on innovations like automation, robotics, and data management.

Now seems like a particularly opportune time to pick up shares of XPO: The stock is trading at a discount, falling more than 50% from its all-time high in September. The stock plunged over the past few months from a combination of the broader market sell-off, a customer bankruptcy leading to a guidance cut, another earnings warning, and a short-seller report by Spruce Point Capital; the report said the company's debt burden was unsustainable, and called out CEO Brad Jacobs' involvement in a previous accounting scandal at United Rentals. XPO, for its part, called Spruce Point's report "intentionally misleading" and full of "significant inaccuracies," then announced a $1 billion share-repurchase authorization in its aftermath.

XPO's shares recently traded at a P/E ratio of just 20.6, and the company has several catalysts working in its favor this year. In 2018, the company launched XPO Direct, a service that rents warehouses to customers, taking advantage of its network of warehouses that allow two-day delivery to 95% of the U.S. population. Deutsche Bank predicted that XPO Direct would grow to $1 billion in revenue in a few years.

XPO is also prepping to make acquisitions again, after a break, and said it could spend as much as $8 billion to add new companies. That should add a boost to XPO's already solid top-line growth, making the stock look cheap after the sell-off.

Why you should invest in Stitch Fix

The age-old question of "What should I wear?" is at the center of Stitch Fix's business model. The company is the leader in the niche industry of subscription and on-demand clothing boxes. Stitch Fix is an online personalized styling service that sends five items of clothing at a time based on customer preferences such as style, fit, and budget; customers keep what they want and return the rest. Stitch Fix competes against similar services like Nordstrom's Trunk Club and Bombfell, but it's the biggest of the bunch, with almost $1.4 billion in revenue over the 12-month period ending in January 2019.

Since it went public in November 2017, Stitch Fix has taken investors on a bumpy ride. After debuting at $15 per share, the stock rose as high as $52.44, but then it fell sharply on two consecutive disappointing earnings reports as concerns mounted about slowing user growth. It rebounded to around $30 per share as of mid-March.

Part of the stock's volatility stems from the fact that Wall Street doesn't really know what to make of Stitch Fix. It's the only pure-play styling service stock, and its industry is brand-new. The market isn't sure if fashion boxes are a real growth market or a fad. The collapse of Blue Apron has spooked some investors, who are afraid the clothing-box industry could go the way of meal-kit services, which found profits hard to come by due to fragmentation and have since had to consolidate.

Stitch Fix is a risky stock, but that's partly what gives it such upside potential. The company is profitable and has been for several years, with $50.4 million in net income over the past four quarters.

It also has a number of competitive advantages. In additional to personal stylists, the company uses data science and algorithms to select clothes for its customers. It has gobs of data on fit and style preferences that it learns from customer feedback -- brick-and-mortar competitors get none of that information when they make a sale. Such knowledge informs not just the styling process, but also Stitch Fix's inventory purchases and the development of its private-label brands. In many ways, Stitch Fix's model seems to borrow from Netflix, which also uses data to make customer recommendations and inform its production of original content.

Stitch Fix's numbers are evidence of its competitive advantages. For example, its gross margin of 43.7% last year was significantly better than many mainstream retailers, including Macy's, Gap, and Kohl's.

Investors may be worried about slowing user growth, but revenue was still up 25% in the quarter that ended in January 2019. This growth story is far from over.

Why you should invest in Etsy

One of the biggest e-commerce turnaround stories in recent years has been Etsy, the online marketplace for unique, vintage, or handmade goods. The quirky site has become a favorite for shoppers looking for distinctive items like clothing and accessories, home goods, jewelry, and gifts.

Etsy sputtered after its 2015 IPO, but a change in management in 2017, after activist investors pounced on the stock, put the company on the right track. The stock has returned a whopping 600% over the last three years and could be poised for more.

In a world where Amazon dominates nearly every corner of online retail, Etsy has a rare and valuable asset: a niche that can't be co-opted by big corporations. Shoppers visit to be surprised and delighted by unique and whimsical items, not to buy the kind of utilitarian products that are the bread and butter of retailers like Amazon and Walmart. Amazon actually tried to challenge Etsy directly, launching its copycat website Amazon Handmade. However, the smaller site has largely deflected the threat and its growth has been uninterrupted. Sellers have noted that Amazon's terms were less friendly than Etsy's -- charging higher commissions, among other differences -- and Etsy has millions more listings.

Like Amazon itself, Etsy benefits from network effects. Sellers in the online flea market go where the buyers are, and buyers go where the sellers are. There's no stand-alone site that comes close to direct competition with Etsy.

Since Josh Silverman's appointment as CEO in May 2017, Etsy has delivered six straight quarters of accelerating gross merchandise sales, clocking in at 22.3% in the fourth quarter of 2018. The company has seen even faster revenue growth recently, after raising its seller transaction fee from 3.5% to 5% and adding new higher-service tiers called Etsy Plus and Etsy Premium, which offer sellers more benefits at an additional cost. With the help of the higher transaction fee, revenue jumped 46.8% in the fourth quarter, and for all of 2018 it rose 36.8% to $603.7 million. Etsy has said it will invest the extra revenue in marketing and in improving its online platforms.

As a result of that growth and the power of its marketplace model, operating income nearly tripled from $29 million in 2017 to $83 million last year. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), the company's preferred metric, grew a healthy 74.4% in that same period, rising to $139.5 million.

With no direct competitors, a unique focus on a niche industry, and competitive advantages like network effects and switching costs, Etsy should have a long run of growth ahead. And profit margins should ramp up as it draws more benefits from its marketplace model over time.

Up, up and away

2019 is shaping up to be another strong year of economic growth: Consumer confidence remains high and unemployment and gas prices are low. That all favors high-priced e-commerce stocks like the group above, which are sensitive to the macroeconomic climate.

A basket of e-commerce stocks would have crushed the broader market over the last 10 years, as the economy expanded following the financial crisis. E-commerce still makes up less than 10% of overall retail, giving the sector plenty of room for growth, as companies make advances in technology and more consumers embrace the convenience of online shopping.

As long as market dynamics and the broader economy remain favorable to high-growth companies, e-commerce stocks should be winners again in 2019. Focusing on companies that deliver high growth, increase profit margins, and demonstrate competitive advantages will give you the best chance to profit from this huge opportunity.

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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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors.

Jeremy Bowman owns shares of Amazon, FB, NFLX, Stitch Fix, and XPO Logistics. The Motley Fool owns shares of and recommends GOOGL, GOOG, Amazon, Etsy, FB, FDX, NFLX, Stitch Fix, and W. The Motley Fool recommends EBAY, HD, JWN, XPO Logistics, and YELP. The Motley Fool has a disclosure policy.