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E-commerce stocks face a challenging economic environment as consumers pull back on spending. But growth should continue as big players take market share from brick-and-mortar retailers. That leaves opportunities for investors to put money to work in attractively priced online consumer retail stocks.
“A lot has changed in the retail landscape over the past four years, but one thing has not. The shift from brick-and-mortar retail toward online commerce is set to resume its inexorable march as consumers emerge from a challenging spell,” says Morningstar senior equity analyst Sean Dunlop. “Investors would do well to stock up on high-quality names that trade at big discounts.”
Dunlop points to two stocks as the top picks in this group:
“Longer term, e-commerce’s position as the low-cost channel should cement durable market share gains. As fulfillment costs decline with higher route density and utilization rates, we expect the channel to be cost-competitive for a broader swath of lower-priced but higher turnover items,” Dunlop says. “Even adjusted for fulfillment cost, the average online marketplace operator in our coverage is roughly twice as profitable as the average brick-and-mortar player, driven by strong square footage and headcount productivity,” he explains.
Dunlop also highlights four other companies:
Amazon AMZN
eBay EBAY
Etsy ETSY
MercadoLibre MELI
The Post-Covid Retail Stock Landscape
US e-commerce sales skyrocketed during the global covid-19 quarantine, increasing 42.7% between 2019 and 2020. This has slowed down significantly, with an increase of just 7.4% between 2022 and 2023. While the outlook for the coming year is challenging, Dunlop predicts the industry will see a gradual increase in growth over the next few years, to 10.3% in 2028 from 5.5% this year.
That outlook is “reflective of dour near-term consumption spending expectations, with higher interest rates and recovering savings rates representing potent headwinds,” he says.
Revenue growth in the industry in the United States will be slow over the next five years, averaging 7.8% annually, compared with the 18% annual growth it saw over the past five years. That’s still 3.9 times faster than the projected numbers for brick-and-mortar retail spending, Dunlop says.
By 2028, nearly 20% of US retail sales will come from online sources, up from 15%-16% today. “We see no looming near-term ceiling, with online commerce’s headcount and space efficient model looking cheaper to run [on average] than brick-and-mortar,” explains Dunlop. At the same time, “the largest online marketplace operators in our coverage should see their take rates increase by nearly 2.4 points cumulatively over the next five years as they expand their reach further into auxiliary services like advertising, financial services, and logistics.”
More than half of that growth, 53%, will be driven by advertising. Dunlop expects Amazon, MercadoLibre, and Allegro to emerge as “clear winners” of these trends, “with high customer frequency and high share of customers’ online spending solidifying them as keystone partners in their respective markets. We continue to view Etsy, eBay, and Chewy as likely beneficiaries as well, though softer gross merchandise sales per user and lower regional market share render them second-tier partners in the broader retail ecosystem.”
Top E-Commerce Stocks
“Our key takeaway is that in an industry that naturally lends itself to winner-take-all or at least winner-take-most dynamics, investors should be careful to funnel capital toward companies that dominate their niche and benefit from durable, self- reinforcing marketplace network effects,” Dunlop says.
“Investors will do well to invest in e-commerce platform winners like Amazon, MercadoLibre, Etsy, and Allegro at attractive prices, with a winner-take-most competitive dynamic suggesting that those firms’ competitive position grows stronger each year,” he says. Worth approaching with more caution are “firms that have not yet consolidated market share and which operate without a proven economic model, like The RealReal REAL,” which are at risk of decreasing in value.
Ultimately, Dunlop thinks second-tier players could become irrelevant, especially given their positions in smaller vertical markets that may not need to stand alone. “E-commerce investors should invest in a small cadre of winners and avoid everyone else like the plague, or at least wait until their competitive position grows more secure.”
Here are excerpts of commentary on Dunlop’s recommended e-commerce stocks.
Allegro
Quantitative Fair Value Estimate: US$6.70
Quantitative Morningstar Rating: 3 stars
Quantitative Economic Moat: Wide
Quantitative Morningstar Uncertainty Rating: High
“We see substantial upside from Allegro’s BNPL lending partnerships and underpenetrated retail media network that we believe is underappreciated. Strong regional marketplaces have been able to defend their turf thus far, and we see no structural impediments to Allegro ads expanding beyond 3% of GMV, from just 1.8% today.”
—Sean Dunlop
Chewy
Fair Value Estimate: US$29.00
Morningstar Rating: 3 stars
Economic Moat: Narrow
Morningstar Uncertainty Rating: Very High
“Chewy looks like an attractive long-term play as the online pet consumable, retail, and healthcare market is divvied up between Chewy, Amazon, and to a much lesser extent, Walmart WMT.”
—Sean Dunlop
Amazon.com
Fair Value Estimate: US$193.00
Morningstar Rating: 3 stars
Economic Moat: Wide
Morningstar Uncertainty Rating: High
“It’s no coincidence that Amazon generates head-and-shoulders better monetization on a per-user basis reflective of its sprawling global customer base, those customers’ high purchase frequency and volume, and proximity to transactions, with the firm scoring uniquely well on all four facets of effective marketing platforms: automation, identification, shoppability, and attribution.”
—Dan Romanoff, senior equity research analyst
eBay
Fair Value Estimate: US$54.00
Morningstar Rating: 3 stars
Economic Moat: Narrow
Morningstar Uncertainty Rating: High
“We take a positive view of eBay’s strategic framework. After divesting a number of noncore segments, its marketplace looks similar to the vibrant platform of the early 2000s, with the firm leaning into its core competency of price discovery for non-new, in-season wares. After unsuccessful forays into fulfillment services and low-value customer segments, the company has prioritized its bread and butter “focus categories,” with expansion into authentication services, tuck-in acquisitions, and vertical investments driving healthy growth for eBay’s most distinct inventory. Those categories now represent 30% of gross merchandise volume, or GMV, and disproportionately cater to the 16 million high-value ‘enthusiast’ buyers who funnel more than $3,000 in annual spending toward the commerce platform”
—Sean Dunlop
Etsy
Fair Value Estimate: US$100.00
Morningstar Rating: 4 stars
Economic Moat: Wide
Morningstar Uncertainty Rating: Very High
“Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target non-commoditized inventories, generate commissions on third-party, peer-to-peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price-elastic product suite. The firm’s core “Etsy” marketplace accounts for roughly 90% of consolidated gross merchandise volume.”
—Sean Dunlop
MercadoLibre
Fair Value Estimate: US$1,500.00
Morningstar Rating: 3 stars
Economic Moat: Wide
Morningstar Uncertainty Rating: High
MercadoLibre is the local marketplace winner in Latin America. “The net effects of Mercado Pago’s robust, multipronged growth are an uptick in formal financial system penetration, with some of the strongest annual e-commerce growth rates in the world sitting across the firm’s Latin American footprint, and swelling market share in its commerce business, with more than a third of regional online commerce volumes now funneling through MercadoLibre’s commerce platform, up 5 percentage points since 2019.”
—Sean Dunlop
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