How to invest in e-commerce companies

TL;DR

  • COVID-19 has massively accelerated e-commerce growth 4 to 6 years, according to an Adobe report.
  • Online-only retailers might still have some physical locations for distribution centers and corporate offices, but they are able to cut down business costs by establishing online stores.
  • E-commerce is an industry with a potential worth of $600 billion by 2024, according to Statista.

COVID-19 has massively accelerated the growth of e-commerce with total online spending up 77% year-over-year—yet, the industry still has plenty of room for growth ahead, especially among small-cap stocks. Nowadays, customers’ shopping experience does not stop at purchasing a product; it starts with a customer discovering a product either through self-discovery or ads, to comparing options online, looking for discounts, then to purchasing the product, getting the product, reviewing it, and last but not least sharing it with his or her social network. E-commerce touches every point in the shopping and transaction journey.

Any company that makes its sales on the internet is considered an e-commerce business. These days, that doesn’t just mean a website. Goods can be purchased directly through a social media ad, mobile app, or even SMS. While online-only retailers still have physical distribution centers and corporate offices, they have largely reduced the costs associated with physical stores such as rent, in-store staff, and potential losses from shoplifting by establishing online stores.

Retail sales in the U.S. total more than $5 trillion a year ($6 trillion when you include restaurants). Interestingly, less than 10% of all retail sales take place online, meaning that the e-commerce market today is worth about $500 billion to $600 billion. That leaves plenty of opportunity for growth. In the past ten years, e-commerce sales had grown 15% year over year. As technology improves and payments become more streamlined, the e-commerce industry certainly is benefiting and riding from this technology upgrade.

Besides online retail stores, in the past decade, many restaurants and coffee shops, such as Starbucks and Chiptole, also shifted their focus to online ordering and delivery. During COVID-19, the growth of online restaurant ordering and on-demand delivery services accelerated as people were staying at home. The demand for online shopping and order continues to grow and the habit of shopping and ordering online will likely remain a new normal for many people.

There are about many publicly-traded e-commerce companies, range from the biggest fish in the sea (Amazon) to smaller cap players that are e-commerce adjacent (Wix). The majority of them priced above $100 per share. As these big companies ask for a higher cost per share, many people with low investment budgets usually don’t have enough money to invest in big companies flexibly. This leads to the stock market stereotype that only the wealthiest can capitalize on long-term investing.

Fractional shares, aka slices, change all of that. Thanks to slices, investors can buy stocks without having to purchase the whole share. Now, you can invest in your dream companies with whatever dollar amount you have. For example, if a company you like is trading at $100 but you have only $20 to invest, you could now buy 20% (or 1/5) of a share of the company. Should the price of that stock rise and you decide to sell, you would earn a return in proportion to your original slice.

This is helpful if you want to gain exposure to (which is a fancy financial way of saying buy) a stock that is more expensive than what you have budgeted. Buying slices of shares in different companies can enable portfolio diversification, and potentially lower your risk exposure to one single stock. In other words, instead of having all your money tied up with one share of a pricey stock, you can now buy slices of one share in multiple stocks. Buying slices of shares in different stocks could help diversify your investments and potentially reduce your risk.

What qualifies as an e-commerce company?

Companies that run the majority of their businesses online are considered in this category. Most of these companies fit into one of the below four categories:

  • Direct-to-consumer companies are basically like a physical store that often operates exclusively online. The name DTC implies a key aspect of the business: these companies go straight to the source and do not rely on other companies (e.g. retailers) to distribute their products. Direct-to-consumer sellers own their inventory and sell it to customers. Casper is a well-known example here.
  • Marketplaces function as platforms to connect buyers and sellers. These platforms earn money by taking a commission on sales and providing services to their merchants. Think Amazon, Etsy, or eBay.
  • Software providers play an important role in the whole e-commerce ecosystem as they provide cloud-based services that facilitate transactions and other functions like marketing, payment, customer service, and sales management. Think Shopify or Square.
  • Logistics and delivery providers handle the last leg of the product journey. They deliver the items to their final destination, be it in the neighborhood or across the globe. Think FedEx and UPS.

Why do people invest in e-commerce?

With technological development, customers now could easily research and buy products from e-commerce sites rather than visiting physical store locations. Yet, e-commerce penetration is still low in comparison to the retail market. Therefore, there is tremendous room for growth in the e-commerce sector with billions of dollars up for grabs.

How do you find e-commerce companies to invest in?

You may not realize that some of the big-name brands you’re purchasing your products from online are available to buy (in the form of shares!). It’s helpful to create a watchlist of stocks and ETFs in the e-commerce sector and get used to the theme. On the Public app, you can start with any stocks and ETFs that interest you, marking them as favorites without investing and keeping an eye on them as part of your daily or weekly routine.

Following news and updates from companies and ETFs you are interested can help you stay up to date. You can learn a lot about them every day by keeping an eye on relevant market news in the feed of Public’s app. For all of the same reasons that a big part of being a good writer involves reading, being a great investor means researching. Learning, tracking, and staying engaged is a useful way to build up your knowledge.

The bottom line

Investing in e-commerce is appealing to some investors given the potential growth trajectory analysts predict, especially in the post-COVID era. The sector has improved quite a bit over the years, with lots more room to grow as technology advances. Payment processing software and delivery services have shown tremendous growth in the past few years. The e-commerce theme on Public, Click It Or Ship It, includes a wide range of companies from online marketplaces such as Amazon, big-box retailers like Walmart, and adjacent companies like Shopify, which empower businesses of all sizes to sell online.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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