How to Invest in E-Commerce: A Guide

Key Points

• E-commerce has become a significant and distinct part of the global economy.
• E-commerce now represents a significant part of the retail sector of the United States.
• Investing in e-commerce involves exploring opportunities in online retail marketplaces

During the COVID-19 pandemic, e-commerce experienced an unprecedented boom as online shopping skyrocketed during lockdowns. Years later, this surge has not receded, and online shopping has become the new normal for consumers. Retail giant Amazon has revolutionized how consumers shop and disrupted traditional retail business models.

E-commerce has become a significant and distinct part of the global economy, and investors may wonder how best to capitalize on its opportunities. Keep reading to learn more about the sector and how to invest in e-commerce.

Key Takeaway

Investing in e-commerce involves exploring opportunities in online retail marketplaces and the technologies that support them to capitalize on consumer preference shifts, digital market trends, and the sector's continued growth.

Understanding e-commerce

E-commerce refers to any business offering goods and services online through electronic transactions. But it is more than just online marketplaces — the sector also includes software services for online selling, payment processing systems, artificial intelligence companies, and other related services.

E-commerce now represents a significant part of the retail sector of the United States. In 2022, 14.6% of retail purchases took place online, a number that grew to more than 20% in 2023. In fact, e-commerce purchases are expected to grow by an additional 11% globally through 2027.

Ways to invest in e-commerce

When considering an investment in e-commerce, you have many strategies, each offering a unique entry point into the sector. The best choice for you will depend on your risk tolerance and investment capacity. There are various ways to invest in e-commerce, each offering a unique entry point into the sector and suited to different risk tolerance levels and investment capacity.

Stocks

Purchase shares in leading e-commerce entities such as online marketplaces, software providers, or payment processors. Focus on companies with robust businesses, strong market positions, scalable platforms, a broad customer base, and innovative technology. 

Key players include marketplace giants Amazon.com NASDAQ: AMZN, Shopify NYSE: SHOP, eBay NASDAQ: EBAY and Etsy NASDAQ: ETSY, software companies like Wix.com NASDAQ: WIX and Salesforce NYSE: CRM, and payment processors like PayPal Holdings NASDAQ: PYPL.

Startups

Investing in e-commerce startups through venture capital is an option that comes with potentially greater returns but also greater risk. Assess the startup's market size potential, innovation level, and leadership expertise. An example is Stitch Fix NASDAQ: SFIX, which offers personalized online shopping experiences.

ETFs and mutual funds

To mitigate the volatility of individual stocks, consider investing in e-commerce exchange-traded funds (ETFs) and mutual funds. These funds invest in a basket of e-commerce-related stocks ranging from retail giants to smaller tech firms and provide diversity and a broader growth trajectory across the sector. One option is Amplify Online Retail ETF (IBUY), which tracks a portfolio of global online retail companies.

REITs

Invest in Real Estate Investment Trusts (REITs) that focus on distribution centers, warehouses, and fulfillment hubs. Look for REITs with well-located properties and robust tenant profiles, as they offer stable rental income and potential capital appreciation, like Prologis. An example of an e-commerce REIT is Prologis NYSE: PLD, which owns facilities that e-commerce companies use for distribution and fulfillment.

Crowdfunding

Platforms like Kickstarter or AngelList allow for smaller-scale investments in e-commerce projects or startups. This method involves lower capital but higher risk, including potential total loss.

Market analysis and trends

As businesses and consumers increasingly pivot online, it's essential for investors to understand the trends shaping the e-commerce sector. Let's look at how these trends are influencing consumer behavior and the competitive landscape:

Continued growth in global e-commerce

E-commerce has experienced significant growth over the last decade, accelerated by the COVID-19 pandemic. With ongoing improvements in infrastructure and internet accessibility, this trend is expected to continue. China and India have been strong contributors to this growth, driven by their large, tech-savvy populations and widespread adoption of mobile commerce.

Advancements in technology

Today's consumers demand convenience, speed, and personalization in their shopping experiences, spurring innovations such as:

• Artificial Intelligence: Enhancing customer service via chatbots and optimizing logistics and inventory management.
• Augmented/Virtual Reality: Allowing consumers to visualize products in their space before purchase, improving the shopping experience.
• Blockchain: Increasing supply chain transparency and security.
• Drones and Autonomous Vehicles: Innovating in last-mile delivery.
• Social Commerce: Transactions on social media platforms like Pinterest NYSE: PINS and TikTok are redefining brand-consumer interactions.
• Mobile Commerce: With over 72.9% of all e-commerce sales coming from mobile devices in 2021, the importance of mobile optimization continues to grow.

Shifts in consumer preferences

Changes in consumer preferences have spotlighted promising e-commerce niches:

• Eco-Friendly and Sustainable Products: Growing consumer awareness about environmental impact is boosting platforms offering sustainable goods.
• Health and Wellness: There is increasing demand for products like supplements and telemedicine services.
• Subscription Services: Gaining popularity, these services provide recurring revenue and enhance customer loyalty by delivering curated products directly to consumers, ranging from meal kits to beauty items.

Evaluating e-commerce investment opportunities

Before investing in e-commerce, consider the following factors:

Market potential

Evaluate the maximum sales or revenue a business might achieve at full market saturation. Focus on areas with high demand and low competition or where the company offers a unique selling proposition.

Operational feasibility

Examine the efficiency of the supply chain, logistics, and production capabilities to ensure they meet customer demands. This includes assessing potential partners like suppliers and shipping providers.

Financial viability

Check if projected revenues can cover operational costs and generate profit. Calculate the break-even point where revenues equal costs and estimate the expected return on investment (ROI).

Competitive landscape

Identify major competitors, analyze their strengths and weaknesses, and understand their marketing and supply chain strategies.

Technological capabilities

Assess the technological infrastructure, including website design, user experience, inventory management, payment processing, and customer service. Reliable technology is crucial for e-commerce success.

Regulatory compliance

Ensure understanding and adherence to laws regulating online businesses, including data protection, taxes, consumer rights, and product safety.

Customer experience

Evaluate the entire customer journey, from website navigation to package delivery. Consider customer loyalty and brand strength through reviews and repeat customer rates, as these are indicators of long-term sustainability.

Building a diversified e-commerce investment portfolio

Here are some tips to help you achieve a well-rounded investment portfolio in the e-commerce sector:

• Invest in a mix of online retail platforms, technology providers, and logistics firms.
• Include companies with high growth potential as well as stable, undervalued companies.
• Expand your investments internationally to capitalize on global e-commerce trends and mitigate regional risks.
• Combine various investment types, such as direct equity in companies, venture capital startups, and broader exposure through ETFs and mutual funds. 
• Incorporate companies with differing business models like dropshipping, white labeling, wholesaling, manufacturing or affiliate marketing to provide multiple income streams.
• Include companies with various income streams like product sales, advertising revenue, partnerships with other businesses or data monetization.
• Implement risk management strategies like stop-loss orders and options for hedging and maintain a cash reserve for protection against market volatility.
• Assess and adjust your portfolio continually to align with market changes and your investment goals.

Investment platforms and tools

When choosing the right platform, you should first consider your investment goals. Determine whether you're looking for growth, value, income, or a mix of these, and how actively you want to manage your investments. Next, look for user-friendly interfaces, educational resources, and analytical tools that match your experience level and investment approach. Make sure to check for transaction fees, account minimums, and accessibility of funds, which can impact your investment returns and flexibility.

Let's explore some of your options:

Public and private equity platforms

E*TRADE, Fidelity, Schwab and TD Ameritrade: These platforms are user-friendly and suitable for buying stocks of major e-commerce companies. They offer easy access to public equities with low or no fees, making them ideal for beginners and casual investors.

AngelList and SeedInvest: These are excellent for those interested in venture capital opportunities in startups, including e-commerce. They allow investors to engage in early-stage funding.

ETF and mutual fund platforms

Vanguard and Fidelity: Known for their broad selection of mutual funds and ETFs, these platforms provide options for diversified e-commerce investments with minimal effort.

REIT platforms

Fundrise and RealtyMogul: These platforms offer REITs that focus on commercial real estate suitable for e-commerce logistics, like warehouses and distribution centers, providing a different angle on e-commerce investing.

Benefits of investing in e-commerce

Thanks to its convenience, the e-commerce industry has become more popular with consumers, which may make it appealing to growth investors. 

• High growth potential: Online sales are expected to continue rising as the global economy becomes more interconnected, presenting growth investment opportunities.
• Low overhead costs: Compared to brick-and-mortar stores, e-commerce businesses generally have lower overhead costs, spending less on staffing costs and rent. This can lead to higher profit margins, making it appealing for investors.
• Diversification: Investing in e-commerce helps spread risk across different technologies and consumer sectors.

Risks of investing in e-commerce

Like any investment, investing in e-commerce comes with risks, including:

• Cybersecurity concerns: The virtual payment networks needed for online shopping make e-commerce businesses vulnerable to cyberattacks. Crimes like data breaches and hacks can lead to lawsuits and damage a company's reputation, leading to sharp losses. 
• Supply chain demands: Because e-commerce businesses rely on their suppliers and manufacturers to provide products, supply chain disruptions, such as natural disasters or labor disputes, can result in product shortages and lost revenue.
• Intense competition: The e-commerce sector is highly competitive, with many players vying for market share, which can challenge profitability and growth.

Future of Investing in E-Commerce

As the e-commerce industry is constantly and rapidly evolving, artificial intelligence (especially personalized shopping experiences), mobile commerce, and the use of social media as sales platforms are expected to dominate. Additionally, as access to the internet increases globally, internet, new markets will emerge, offering fresh opportunities for investors. 

Investors will also need to continue navigating through increased regulatory scrutiny, heightened competition, and the need for sophisticated cybersecurity measures — none of those headwinds are going away in the future. 

Capitalizing on e-commerce 

Investing in e-commerce offers a compelling opportunity to be at the forefront of technological innovation and consumer trends. Regardless of your investment route, it's essential to stay informed about the evolving landscape and adapt your strategies accordingly. With the right approach, investing in e-commerce can yield significant returns as the digital marketplace continues to expand and transform.

FAQs

Let's take a look at some commonly asked questions about e-commerce: 

How do you invest in e-commerce?

Investing in e-commerce can be done through various avenues, such as purchasing stocks of online retail companies, investing in e-commerce startups, or buying into ETFs that focus on e-commerce businesses. Investors can also explore venture capital opportunities or consider real estate investments in e-commerce logistics, like warehouses and distribution centers.

Is e-commerce really profitable?

E-commerce can be highly profitable, driven by increasing global internet usage and consumer preference for online shopping. Profitability varies widely depending on factors like market niche, operational efficiency, and the ability to adapt to changing consumer demands and technological advancements. Successful e-commerce companies often show strong growth metrics and have scalable business models.

How much do I need to invest in e-commerce?

The amount required to invest in e-commerce varies greatly depending on the investment approach. For example, venture capital investments typically require a larger outlay but offer the potential for significant returns. Entry-level investments in crowdfunding platforms can start from a few hundred dollars, making them accessible to a broader audience.