News Analysis date published New: 
Tuesday, November 27, 2012 - 01:00
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Wednesday, November 28, 2012 - 09:19
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Tuesday, November 27, 2012 - 01:00

These 3 Stocks Are Riding the Fast-Growing Online Shopping Craze

Tuesday, November 27, 2012 - 1:00am

"Black Friday" is considered the most important day of the year for many retailers. But if the current trend continues, then it's only a matter of time before a new champion sits atop the throne.

In the past few years, consumers have increasingly turned to online shopping so they can avoid the madness of deal-thirsty shoppers lining up outside traditional brick-and-mortar operations.

That was on full display recently, with e-retail sales jumping 29.3% on Thanksgiving Day and Black Friday, while store sales were virtually unchanged, according to Internet intelligence firm comScore (Nasdaq: SCOR) and payment processor Chase Paymentech.

And that's not including Cyber Monday, the Monday after Thanksgiving, which many online retailers use to unleash great deals and drive sales growth. Total sales on Cyber Monday reached $1.98 billion, a 17% increase from last year, according to a report from Adobe Systems (Nasdaq: ADBE).

But bullish online sales on Thanksgiving, Black Friday and Cyber Monday are just a glimpse of a larger trend changing the way consumers shop. About 66% of consumers prefer Web retailers while 73% of survey participants complete almost 50% of their shopping online, according to a recent survey conducted by market research firm Lab42.

Mobile devices are also playing a big part in the trend as e-retailers discover how to entice potential shoppers on the run. Nielson recently reported that almost 50% of U.S smartphone owners use shopping apps each month. Another report from IBM (NYSE: IBM) noted that 25% of traffic to retail sites on Thanksgiving Day and Black Friday came from smartphones and tablets, up a whopping 66% from last year.

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But even though brick-and-mortar retailers are increasingly exploiting this relatively new sales channel, the real winners are the companies that develop the technology and systems involved in creating the infrastructure to support Web sales.

In fact, based upon these recent trends, many analysts believe that e-commerce will completely change the way shoppers consume and fundamentally transform the traditional brick-and-mortar retail model in the next 20 years. If that's the case, then companies that develop e-commerce systems and services are uniquely positioned to score big gains.

Here is a closer look three of my favorite companies set to capitalize on the bullish trend in Web sales.

1. Digital River Inc. (Nasdaq: DRIV)
Digital River develops tools and systems that help retailers capture and process online transactions and payments. Its core services include designing and hosting online stores and shopping carts, order management systems, Web analytics and payment-processing systems, Digital River's fastest growing segment with third-quarter sales up 30% from last year. In addition, the company announced in September the acquisition of LML Payment Systems, a $103 million deal that's expected to close by the end of the year.

Digital River's forward price-to-earnings (P/E) ratio of 34 is a premium to the market average of roughly 14, but with analysts projecting 50% earnings growth in 2013, the company is clearly cashing in on the growing trend in e-commerce.

2. Akamai Technologies Inc. (Nasdaq: AKAM)
Akamai develops applications that increase the speed and security of online data transactions between companies and their customers. Akamai also offers website analytic programs and business performance management software tools. The company has already been cashing in on the bullish trend in online sales and data, with projected revenue of more than $1.2 billion in 2012, which is more than double from just five years ago.

That has helped Akamai deliver impressive earnings this year, handily beating estimates in each of the past four quarters for an average earnings surprise of 9%. Looking forward, analysts are calling for 15% earnings growth in 2013, more than twice the projected earnings growth of the S&P 500.

3. Amazon Inc. (Nasdaq: AMZN)
Most investors know Amazon as a pioneer in the online retail space. But what most people don't realize is that the company is also branding and selling the same internal tools and systems it used to build its incredibly successful business to other small businesses as well. These services enable third-party sellers to integrate Amazon's Web services on their own websites, in addition to providing access to the company's technology infrastructure through its Web Services division.

Although Amazon recently reported a tough quarter that has it on pace to lose money in 2012, analysts are optimistic the company will rebound nicely in 2013, projecting full-year earnings of $1.81 a share. Longer term, Amazon in projected to grow its earnings by 28% annually in the next five years, well ahead of the industry average of 19%.

Risks to Consider: E-commerce stocks are generally trading with higher valuations than the market and other industries, as investors look forward to big gains in sales and earnings. Any bad news or a weak earnings report in the sector or specific company could weigh on the group and send shares sharply lower.

Action to Take --> These three companies are leaders and pioneers in the hot and rapidly-growing e-commerce space. And although their valuations are higher than the overall market, the bullish trend in electronic transactions and online shopping will provide plenty of support for these stocks' future earnings growth and share price appreciation.

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.