E-commerce sales were up by 15% in 2012, a year with overall U.S. GDP growth of 2.2%. Year-over-year growth in online commerce has been in the double digits in each quarter since mid-2010, according to comScore. And that trend looks to be accelerating out of the recession.
How can investors capitalize on this trend? There are quite a few avenues to consider.
In this post, I’ll take a look at some companies who try to connect buyers and stores to facilitate e-commerce. (For a look at the companies that deliver all the products purchased online, see this post.)
There are plenty of companies trying to connect shoppers with sellers online. Websites like FatWallet.com, which direct consumers to deals from companies that advertise with the facilitator, abound. Groupon Inc (NASDAQ:GRPN) is the publicly traded play in this area. It connects Internet users with brick-and-mortar retailers and online sellers through its “deal-of-the-day” offers. Launched in late 2008, Groupon Inc (NASDAQ:GRPN)’s sales have grown exponentially, up from just $14 million in 2009 to $2.3 billion in 2012.
But despite that growth, Groupon Inc (NASDAQ:GRPN) has yet to turn an annual profit. And even more worrisome, it operates in a space with few barriers to entry, and already many competitors, including the popular Amazon.com, Inc. (NASDAQ:AMZN)-backed LivingSocial, which also lost money despite doubling its revenue last year.
Simply put, this market already looks overcrowded.
Don’t overlook the obvious
There’s been no single company that’s done more to connect shoppers with products online than Google Inc (NASDAQ:GOOG). There’s also no company better than Google Inc (NASDAQ:GOOG) at turning those connections into reliable profits. As a result, investors have been rewarded with more than 600% gains over the past decade, a period in which the S&P 500 has generated just a 40% return.
And Google Inc (NASDAQ:GOOG)’s run may be far from over. Not only has Google dominated traditional web search, it has also been out in front of the curve in the trend toward mobile web browsing. Its Android platform is the most popular in the smartphone market, and it ensures that consumers who have moved from desktops and laptops to handsets are still using Google to find what they are looking for.
One big concern is that mobile ads have been less lucrative for the search giant. Google Inc (NASDAQ:GOOG) grew its revenues by an impressive 36% year-over-year from 2011 Q4. But it was spending money at an even faster rate. Its cost of revenue grew by 68% year-over-year. As a result, its GAAP operating margin plummeted from 33% to 24%.
So while Google still dominates the search market, it dominates a market that may be offering a shrinking opportunity for big profits. If those margins continue to contract, investors could flee Google Inc (NASDAQ:GOOG) in a hurry. We need only to look at Apple Inc. (NASDAQ:AAPL) to see how shrinking margins can send Wall Street running from a stock that it had just been smitten over.
Of course, it’s still very early in the game in mobile search and advertising, and Google Inc (NASDAQ:GOOG) may figure out ways to make this line of search more profitable as more web users make the shift to handheld computers. It is a very innovative company that has adapted to a changing Internet game game as well as any other company in the space. Indeed, along with companies like Apple and Amazon, Google has helped define how people use the Internet.
But for now, it remains a concern that investors should not ignore.
And then there’s Amazon … again
An argument can certainly be made that Amazon.com, Inc. (NASDAQ:AMZN)’s march toward becoming a one-stop shop for all things you can buy on the web is stealing away some of Google’s e-tail search traffic. Many would-be shoppers who had previously started product search with Google now go straight to Amazon and use the search bar there. Its impact here can’t be dismissed.
Last year, comScore reported that Amazon.com, Inc. (NASDAQ:AMZN)’s product search queries were up 73%, while Google Inc (NASDAQ:GOOG)‘s remained relatively flat. This is yet another reason why Amazon.com, Inc. (NASDAQ:AMZN) looks poised for domination across the e-tail landscape, and why it is duly attracting the attention of many growth investors.
I took a more in-depth look at Amazon in my first post about e-tail, so I won’t get into too many details here. Although Amazon.com, Inc. (NASDAQ:AMZN) is gobbling up market share with every passing quarter, it’s far from a slam dunk. The company is experiencing increasing costs and undertaking a major build-out of warehouses, cutting into profits and establishing some ongoing expenses that could create margin pressure for years to come.
Amazon also carries a good amount of risk, as its stock price is untethered to its financial underpinnings. So while Amazon.com, Inc. (NASDAQ:AMZN) carries great potential, investors must have a healthy appetite for risk.
The bottom line
There are a number of ways to play the e-tail megatrend, and some of the best investments may be hiding right under your nose. Google is one of those companies. It has staked out a dominant position in search and has turned big profits by connecting potential buyers with the sellers of goods online. If you’re searching for e-tail profits, Google Inc (NASDAQ:GOOG) is at least worth a closer look.
The article Searching For E-tail Profits? This Company Can Help originally appeared on Fool.com and is written by John-Erik Koslosky.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
