Forget Jack Ma’s Alibaba, Buy These 2 E-Commerce Stocks Instead

Forget Jack Ma’s Alibaba, Buy These 2 E-Commerce Stocks Instead

The COVID-19 pandemic brought many industries to the front and center of investors’ awareness. That includes e-commerce companies, and China’s Alibaba is one of the biggest online retailers in the world. Naturally, the size of its massive enterprise makes investors wonder whether they should buy some stock. But that’s been complicated lately by two worrisome news stories: China’s government has launched an anti-monopoly investigation into Alibaba, and founder Jack Ma seems to have disappeared from the public eye.

Some suggest that Ma is simply staying out of the limelight right now; I personally hope that’s true and he’s well. Furthermore, Alibaba may still wind up being a good investment once China’s investigation is over. But it’s far from the only great e-commerce company out there. 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. Here’s why these are two e-commerce companies you need to know.

1. Etsy: The handcrafted niche player
According to the Census Bureau, total e-commerce sales increased 36.7% year over year in the U.S. in the third quarter of 2020. Although impressive, it’s a yawn-worthy growth rate compared to Etsy’s. For its Q3, Etsy’s revenue soared 128% from the prior-year period. And its revenue through the first three quarters of 2020 is up 102% from the comparable period of 2019.

Etsy has grown in 2020 through new customer additions and new sellers. At the end of 2019, the company had 2,699 active sellers and 46,351 active buyers. But as of the end of Q3, Etsy had 3,681 active sellers and 69,649 active buyers, up 36% and 50%, respectively, in just nine months. Expect robust growth to continue, too. An expanding user base will likely 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 seller products outside of its platform. Not only does this open Etsy’s products up to a larger audience, but the company also takes a 12% to 15% cut of these sales, allowing it to leverage seller growth into even higher revenue growth.

Here’s one more thing that bears pointing out explicitly: Because Etsy doesn’t hold or ship merchandise, many of its costs are fixed and it’s able to leverage its revenue growth into bottom-line profits. Through the first three quarters of 2020, Etsy’s operating income skyrocketed 312% higher to $263 million. That tremendous surge in profitability should at least cause investors to pause and consider investing in Etsy.

2. Pinterest: A more positive social media platform
Right now, Pinterest operates in one business segment and, according to its most recent filings, all revenue is generated via ads. However, investors shouldn’t overlook the image-based social network’s recent integration with Shopify. With a single click, companies can upload their product catalogs to Pinterest’s platform.

As Pinterest users peruse the images on the platform, they may stumble upon items they like. Perhaps users will eventually start getting on simply because they know they want something but aren’t quite sure what, allowing Pinterest’s algorithm to guide them through similar images until they find what they’re looking for. It’s unclear whether the company plans to monetize this differently than ads in time. But no matter the eventual monetization strategy, this makes Pinterest a unique e-commerce play.

Here’s a simple explanation of why I really like Pinterest long-term: It’s attracting new users at an impressive rate. In the third quarter of 2020, global monthly active users were up 37% year over year to 442 million. Also in Q3, average revenue per user (ARPU) rose 15% year over year to $1.03. There’s still plenty of room to grow ARPU, and e-commerce will play a key role in that.

E-commerce for the win
Both Etsy and Pinterest crushed the market in 2020, and these triple-digit annual returns will be hard, if not impossible, to replicate in 2021. However, if you give these growth stories enough time to play out, I’m confident they can create meaningful shareholder value and beat the market over the long term — the best time period for investing in stocks.

Should you invest $1,000 in Pinterest right now?
Before you consider Pinterest, you’ll want to hear this.

Investing legends and Motley Fool Co-founders David and Tom Gardner just revealed what they believe are the 10 best stocks for investors to buy right now… and Pinterest wasn’t one of them.

The online investing service they’ve run for nearly two decades, Motley Fool Stock Advisor, has beaten the stock market by over 4X.* And right now, they think there are 10 stocks that are better buys.

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