Over the past two decades, Amazon (NASDAQ:AMZN) has revolutionized consumer shopping in the e-commerce space. Starting as a book retailer, it has morphed into an everything store. Given its size, the company might have limited growth ahead. But other high-potential e-commerce stocks could grow to Amazon’s size.
Overall, the e-commerce trend is in its early stages and has decades of secular growth ahead. According to Morgan Stanley, global e-commerce comprises 22% of retail sales. Thus, there is room for growth given the advantages offered in this model, notably the convenience and selection.
So, what are the best e-commerce stocks to buy? Obviously, Amazon has been the leader to date, but it’s a popular stock in market indices and investment portfolios. Moreover, with over $500 billion in annual sales, the growth rate will be lower than in earlier years.
Instead, focusing on smaller e-commerce stocks ready to explode might provide better returns. These companies mainly operate in emerging markets where e-commerce penetration is low and set to rise, bringing high-potential for the stocks and their investors.
Often referred to as the Amazon of Latin America, MercadoLibre (NASDAQ:MELI) has cemented its place as the leading online retailer in South America. It operates in 18 South and Central American countries including Brazil, Argentina, Colombia, Panama, Costa Rica and Mexico. Notably, it’s beating Amazon in terms of market share in markets including and similar to Brazil.
Over the past decade, Mercado’s growth has been on fire. And the Covid-19 pandemic only accelerated e-commerce adoption. In fiscal year (FY) 2019, revenues grew 59.50%. While that’s an astounding rate, growth accelerated further in 2020 and 2021, hitting 73% and 78% respectively.
Typically, investors buy e-commerce stocks like MercadoLibre due to their revenue growth. But the company differentiates itself by having exceptional revenue growth and profits. This trend continued in Q1 FY2023, where revenues grew 58.4% year-over-year (YOY) on an FX-neutral basis.
Profits were more impressive, hitting $340 million aided by an improvement in margins to 11.2% from 6.2% in the previous year’s quarter. Management expects to improve profitability further as the business scales. Furthermore, the recent bankruptcy filing of competitor Americana has placed it in a prime position to grab more market share in Brazil
These developments have increased the bullishness in the stock. As of this writing, TipRanks analysts have a $1,536 price target representing a 30% upside. From now on, MELI is positioned for growth in the expanding e-commerce category.
Sea Limited (SE)
Sea Limited (NYSE:SE) provides online retail services through its Shopee e-commerce platform. After soaring more than 700% from between Q1 in 2020 and Q3 in 2021, Sea Limited has fallen back to earth due to a strategic misstep.
In a miscalculated decision to expand into India, Latin America and Europe, the company tried to pursue too many markets while still unprofitable in its core Southeast Asia market. Unfortunately, its strategy didn’t work in Europe and Latin America. And in India, regulatory hostility led to a quick exit.
Still, Sea is one of the best high potential e-commerce stocks to buy due to its market position in Southeast Asia. After withdrawing from the Latin American market in September 2022, the firm has focused on its stronghold. Today, it has over 50% market share in the Southeast Asia region.
As Q1 FY2023 results showed, growth is still solid. The e-commerce segment revenues increased 36.3% YOY, and the firm has significantly improved profitability in the segment as a result, reporting a $207 million adjusted EBITDA profit, compared to a $742 million loss in the first quarter of 2022.
Despite the impressive numbers in e-commerce, the stock plunged 17% after earnings. Investors were spooked by the $2.0 billion of total loans receivable in its digital financial services segment, Sea Money. The decline has continued, with the stock falling from $88 before earnings to the current $61.
The decline presents an opportunity in one of the top high potential e-commerce stocks. In the earnings call, management stated that the increasing receivables and provision for credit losses were manageable. “Non-performing loans past due by more than 90 days as a percentage of our total gross loans receivable remained stable at around 2%,” stated CEO Forest Li.
At current prices, SE stock is one of the undervalued e-commerce stocks. As Shopee capitalizes on its growth initiatives including the Affiliate Program and enhanced seller tools, SE stock will rally.
PDD Holdings (PDD)
A Chinese e-commerce giant, PDD Holdings (NASDAQ: PDD) is growing rapidly despite the emerging weakness in the Chinese economy. It’s one of China’s leading e-commerce players with over 900 million users.
While its core China e-commerce business and Duoduo Grocery segments have been growth drivers over the past five years, it has a new growth engine in the popular shopping app Temu. The app has garnered widespread interest earning a top three in the App Store. Temu The shopping app offers a wide selection of merchandise that’s heavily discounted. Users can enjoy discounts as high as 90% in 22 countries, including the U.S. market after a September 2022 launch.
PDD Holdings has set ambitious targets for Temu and is making significant investments. In 2023, it is targeting $3 billion in gross merchandise value. It hopes to grow GMV to $30 billion in five years.
Notably, Temu has made a unique effort in its advertising efforts. Rather than marketing on Google, Instagram or TikTok, it offers significant discounts and coupons for repeat customers as well as referral rewards. As a result, it has gained considerable momentum in the U.S. market.
In the first quarter, total revenues grew 58% YOY to $5.48 billion. And since high potential e-commerce stocks at a bargain valuation are rare, PDD stock is offering an opportunity to investors now. According to Finviz, the stock is trading at a bargain forward P/E of 16.
Given the popularity of Temu and the strength of its China business, PDD Holdings could be the next Amazon.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.