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Forget Amazon -- These E-Commerce Stocks Are Much Better Values

David Sterman

When I first started writing about investing in the 1990s, the whole notion of "e-commerce" was just getting going.

Analysts then thought this emerging form of retail would continually take away market share from traditional brick-and-mortar stores. They might not have expected that e-commerce would still be growing at a fast clip nearly two decades later.

Last year, U.S. e-commerce sales rose 15.6% to $71 billion, triple the growth rate of traditional retail sales. However, considering that e-commerce sales still account for less than 6% of all sales, there's no reason to expect this niche to slow down anytime soon. In fact, revenues of the major players could double in size over the next five years and still reach just 10% penetration (assuming that traditional store-based sales also rise a modest amount).

Of course, much of that growth will be picked up by Amazon (AMZN), which had more than $60 billion in sales last year. That figure is likely to hit $90 billion by next year and perhaps $100 billion by 2015. That helps explain Amazon's awesome $122 billion market value -- yet investors need to tread lightly with this stock. With EBITDA (earnings before interest, taxation, depreciation and amortization) margins below 5%, a price-to-sales (market value divided by annual sales) ratio above 1.0 can seem somewhat rich.

So instead of simply focusing on Amazon as a way to profit from the e-commerce revolution, consider these lower-priced plays

The Yield Play
While Amazon's investors wait for higher profits and maybe even a dividend, investors can already get a 4.5% yield in the e-commerce space by investing in PetMed Express (PETS), which ships veterinary drug prescriptions and other pet-focused products right to customers' doors.

Though e-commerce companies are often thought of as extremely competitive on price and thus only barely profitable, this company sports double-digit operating margins. This is probably due to the relative lack of direct competition, which enables firm pricing.


The E-Commerce Site for "Big Bang Theory" Fans
One of the nation's top-rated television shows, "The Big Bang Theory" has made it hip to be square, spawning notions of geek chic and "nerdvana." And these folks even have their own dedicated website,

ThinkGeek.com, which is operated by Geeknet (GKNT). The site offers gadgets, apparel, gifts and other wares for fans of Star Trek, "Game of Thrones" and other sci-fi and fantasy fare.

To be sure, this is a company in transition as a set of Web developer sites was recently sold off, leaving only the e-commerce business as a stand-alone business. Proceeds from the asset sales have helped net cash to rise above $50 million, which is more than half of this micro-cap stock's entire market value.

New CEO Kathryn McCarthy was handed the reins in March, and her challenge is to expand this e-tailer's footprint in terms of inventory and traffic. Sales are expected to be around $140 million this year, though that works out to a price-to-sales ratio of just 0.4 (when cash is excluded), a fraction of Amazon's multiple.


The Deep Value Play
Of course, many top e-commerce sites are run by the retailers themselves by simply slapping a ".com" at the end of their name.

To build those sites, these firms often turn to website builders such as Digital River (DRIV), which builds and then hosts sites for hundreds of retailers.

As many firms have largely built out their sites, it's been tough for this company to drum up major new clients. As a result, sales have been stuck in the $400 million range for five straight years, which is around where they are expected to be in 2013 and 2014 as well, according to consensus forecasts.

Still, this remains a very profitable business. Digital River has generated an average $90 million in annual free cash flow over the past eight years. That's enabled the company to park nearly $400 million in net cash on the balance sheet. To put that in context, the entire company is worth just $570 million.

That disconnect has led to a robust spate of insider buying over the past month, as four insiders have bought a collective $600,000 in company stock (at an average price of $14.90 a share).

Risks to Consider: The growth in e-commerce is likely to continue unabated for quite some time, but a slowing economy looms as the major potential headwind, as all commerce activity would be affected.

Action to Take --> Although Amazon is a remarkable success story, it's getting harder to see upside in light of the tremendous market value. These e-commerce plays are much more attractively priced.

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