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3 Top E-Commerce Stocks to Buy for the Long Haul

Online selling has long served as a lucrative growth market, so much so that many e-commerce stocks now support stratospheric valuations. While companies such as Sea Limited and Shopify appear poised to become pillars of this business, the exorbitant multiples could make them less appealing options for new investors.

But other e-commerce powerhouses such as Amazon (NASDAQ: AMZN), Etsy (NASDAQ: ETSY), and Target (NYSE: TGT) offer substantial return potential along with an earnings multiple that should appeal to buyers of internet and direct-marketing retail stocks.

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Amazon

Amazon's massive $1.75 trillion market cap may leave investors wondering whether it offers further significant potential for investors. While a $5,000 investment will likely not turn into millions at this stage, Amazon still holds potential for outperformance. It continues to benefit from massive revenue growth despite quarterly revenue now routinely exceeding $100 billion.

Moreover, it has built another successful business by pioneering the cloud computing industry. Thanks to Amazon Web Services (AWS) innovation, the cloud has not only spawned a new segment of the IT industry, but its leadership in a major business segment outside of retail also has dramatically transformed the conglomerate. AWS only accounted for about 13% of the company's revenue in the first half of 2021. But thanks to its net margin, it has claimed the majority of the company's operating income this year.

Amazon also continues to drive mammoth revenue and profit levels. In the first half of 2021, revenue of $222 billion surged 35% from the first six months of 2020. Net income grew 104% during that time to just under $16 billion, though outside equity gains accounted for slower growth in operating expenses drove much of that return.

As more offline activity resumes, Amazon could see a slowdown in that growth. Consequently, its stock has only risen 6% over the last year. However, that has also taken its P/E ratio to a multiyear low of around 60. That falling valuation makes the stock increasingly attractive as it seeks to emerge from the pandemic and reinvigorate its retail and cloud-driven increases.

Etsy

While Amazon has succeeded with commoditized goods, much of the specialty market has become part of Etsy's ecosystem. As of the end of the second quarter, Etsy had attracted more than 5.2 million sellers of artisan goods, craft supplies, and vintage items. Through these vendors, Etsy has built a community that has attracted more than 90 million active buyers. Additionally, low start-up costs, a specialized search engine, and even an advocacy arm that works on behalf of these businesses keep these sellers in the ecosystem.

Etsy has spawned further growth with a greater international focus. Although it derives much of its non-U.S. business by targeting markets such as the U.K. and Germany, its recent acquisition of Elo7, called "the Etsy of Brazil," shows its increasing interest in the populous markets of the developing world.

In the first half of 2021, more than $6.2 billion in merchandise volume passed through the site, generating nearly $1.1 billion in revenue for the company. This amounted to a 64% increase compared with the first six months of 2020. Over the same time frame, net income surged 122% to $242 million as the company significantly cut interest costs and turned foreign exchange losses into gains.

This strategy has helped Etsy's stock rise by more than 60% over the last year. Also, thanks to profit growth, the P/E ratio has fallen to almost 70, just above Amazon's level. This positions the company to make gains over time as more merchants and customers become part of the Etsy ecosystem.

Target

Target dramatically improved its e-commerce performance when it pivoted into same-day delivery in 2017 by buying Shipt. This sales channel has since grown substantially. Consequently, same-day shipments account for more than half of the company's digital sales.

Moreover, its board passed its 50th consecutive annual payout hike this year, turning the stock into a Dividend King. The latest increase also took the dividend higher by 32%, bringing the annual payout to $3.60 per share, a cash return of 1.4% at current prices. Before the hike, the $676 million in dividend expenses over the last six months was only a tiny fraction of the company's $2.1 billion in free cash flow during that time, making the payout hike easily affordable.

Its recent performance also helped. During the first six months of the year, its revenue of $49 billion grew 16% compared with the same period in 2020. Net earnings also increased 98% during that time to almost $4 billion, mainly on slower growth in expenses. As a result, Target expects record profits this year.

Given this, investors can understand why the stock rose 55% over the last year. Moreover, its P/E ratio of 20 remains well below that of Costco and Walmart, companies that support earnings multiples of just over 40.

Despite these successes, the company has struggled with supply chain issues as America's largest ports experience a slowdown. Moreover, past failures in going international could rise to the surface as its presence in every U.S. state could lead to questions about where it might expand. Nonetheless, the success of its same-day service and low P/E ratio compared to its peers could bolster company growth for the foreseeable future.

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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. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Costco Wholesale, Etsy, Sea Limited, and Shopify. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.


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