• E-commerce stocks surged in 2020 as the pandemic accelerated the adoption of online shopping
• The global e-commerce market is expected to reach $6.4trn by 2024
• Changes to privacy policies are making it more difficult for advertisers

As we begin to progress further into 2022 with the impacts of the pandemic winding down, I wanted to reflect on how well e-commerce stocks have done. It’s not surprising that these businesses have thrived in a world where online shopping became virtually the only method for buying non-essential goods at one point. But was this just a short-term boost or an acceleration of a long-term trend? Let’s explore.

Future performance of e-commerce stocks

The graph above shows e-commerce sales worldwide since 2014, along with forecasted figures for 2024. As expected, there was a sizable jump between 2019 and 2020, courtesy of the pandemic. However, what I find exciting is that despite brick & mortar store reopening, the market is forecast to reach $6.4trn by 2024.

For me, the next logical question is, what does the future landscape look like? The ability to open an online store has never been easier, thanks to e-commerce stocks like Shopify. And with social media platforms, getting advertisements in front of millions of people worldwide can be done even with tiny budgets.

An emerging problem with online advertisements

The privacy changes introduced by Apple with the launch of IOS 14 created new challenges for advertisers. With less targetable data able to be collected, platforms like Facebook have already seen the effectiveness of advertisements start to dwindle.

This is particularly problematic for new businesses trying to find their ideal customers. And to make the situation worse, the cost of advertisement impressions is on the rise, despite their reduced effectiveness. Marketing group Rain the Growth Agency reported that the cost per 1,000 impressions on Facebook alone rose between 5% to 10% in 2021. That makes it much harder for e-commerce stocks to scale up their advertising activities.

What should I be watching for as an investor?

Here at The Money Cog, I spend a lot of time focusing on understanding how a company makes money. After all, finding its growth drivers becomes far easier once I understand a business. And more informed decisions along with assumptions can be made for my portfolio.

In the case of e-commerce, I continue to feel that direct to consumer brands that rely solely on advertisements will struggle to grow revenue at a high pace. Unless, of course, they’re able to develop a strong brand that has an emotional connection with its customers.

Yet, some stocks fail to penetrate the e-commerce market even with this advantage. One company I’ve explored previously with this problem is Warby Parker. This is a direct-to-consumer eyewear company that has a solid brand and reputation. But despite its efforts, physical retail continues to be its primary source of revenue.

Best e-commerce stocks to buy?

In terms of winners in the sector, I strongly believe that the businesses investing capital to better understand their audience will be the victors within this space. Some of my personal favourites for my portfolio include Shopify, Next, and Ocado.

The industry is far from risk-free. The rising level of competition is making it increasingly challenging for companies to get traffic flowing to their online stores. And it’s possible that even the most promising businesses could be left in the dust. But given the projected forecast for e-commerce stocks in general, I think the risk is worth the reward.

Imran Dean doesn’t own shares in the companies mentioned. The Money Cog has published investment reports on Shopify, Warby Parker, Next, and Ocado. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.