The COVID-19 pandemic has brought many industries to the forefront and the center of investor awareness. This includes e-commerce companies and Chinese companies Alibaba is one of the largest online retailers in the world. Naturally, the size of their gigantic venture makes investors wonder if they should buy any shares. But that has been complicated recently by two worrying reports: the Chinese government has launched an anti-monopoly investigation into Alibaba, and founder Jack Ma appears to have disappeared from the public eye.
Some suggest that Ma is simply getting out of the spotlight now; Personally, I hope it’s true and that he’s okay. In addition, Alibaba may still turn out to be a good investment once China’s investigation is over. But it is far from being the only big e-commerce company that exists. In fact, I believe that Etsy (NASDAQ: ETSY) and Pinterest (NYSE: PINS) offer investors greater potential returns than Alibaba over the next five to 10 years. See why these are two e-commerce companies you need to know.
Image source: Etsy.
1. Etsy: The niche craft player
According to the Census Bureau, total e-commerce sales increased 36.7% year on year in the U.S. in the third quarter of 2020. While impressive, it is a growth rate that is worth comparing to that of Etsy. In the third quarter, Etsy’s revenue increased 128% over the same period last year. And its revenue in the first three quarters of 2020 is 102% higher than the comparable period in 2019.
Etsy grew in 2020 with the addition of new customers and new salespeople. At the end of 2019, the company had 2,699 active sellers and 46,351 active buyers. But at the end of the third quarter, Etsy had 3,681 active sellers and 69,649 active buyers, an increase of 36% and 50%, respectively, in just nine months. Also, expect robust growth to continue. An expanding user base is likely to attract more new sellers and more new products will attract more buyers.
Over time, Etsy can monetize its growth in new ways. For example, in May, the company started advertising products from sellers outside its platform. This not only opens Etsy’s products to a wider audience, but the company also receives a cut of 12% to 15% of these sales, allowing the salesperson to leverage growth for even greater revenue growth.
Here is one more thing that should be pointed out explicitly: since Etsy does not store or dispatch goods, many of its costs are fixed and it can leverage revenue growth in final profits. During the first three quarters of 2020, Etsy’s operating revenue soared 312% to $ 263 million. This tremendous increase in profitability should at least make investors stop and consider investing in Etsy.
Image source: Getty Images.
2. Pinterest: a more positive social media platform
Pinterest currently operates in a business segment and, according to its most recent records, all revenue is generated through ads. However, investors should not ignore the recent integration of the image-based social network with Shopify. With a single click, companies can upload their product catalogs to the Pinterest platform.
As Pinterest users scan the images on the platform, they can find items they like. Maybe users start getting along simply because they know they want to something but I’m not sure what, allowing Pinterest’s algorithm to guide them through similar images until they find what they’re looking for. It is unclear whether the company plans to monetize this differently from ads over time. But no matter what the eventual monetization strategy is, it makes Pinterest a unique e-commerce game.
Here is a simple explanation of why I really like Pinterest in the long run: it is attracting new users at an impressive rate. In the third quarter of 2020, global monthly active users increased 37% year-over-year, to 442 million. Also in the third quarter, average revenue per user (ARPU) increased 15% year-over-year to $ 1.03. There is still a lot of room to increase ARPU, and e-commerce will play a key role in this.
By my investment math, the growth in the user base multiplied by the growth in ARPU is equal to the exponential growth for Pinterest – the kind of advantage I’m looking for.
ETSY data by YCharts.
E-commerce to win
Both Etsy and Pinterest crushed the market in 2020, and these three-digit annual returns will be difficult, if not impossible, to replicate in 2021. However, if you give these growth stories enough time to develop, I’m sure that that can create significant shareholder value and win the market in the long run – the best time to invest in stocks.