Facebook's push into e-commerce could benefit these stocks

Published Tue, Oct 6 202011:46 AM EDTUpdated Tue, Oct 6 202011:52 AM EDT

Facebook is pivoting to enable e-commerce on its services as online shopping booms amid the pandemic. The shift by the social media giant is creating an opportunity for a number of smaller companies that are partnering with it. Facebook has typically been a place where brands go to advertise their products. But over the past two years, the company has released a number of new features that have made it possible for brands to not only advertise, but also sell products directly through its apps. As sales increase, that could also benefit a number of brands that are moving early to adopt Facebook's new technology. In particular, Shopify and BigCommerce stand out as two Facebook partners well positioned to reap the rewards of the social network's push into shopping. The two companies offer cloud technology services that make it easy for business to set up online stores, and since Facebook's push into e-commerce, both BigCommerce and Shopify have added features that allow their clients to sell on Facebook's apps. Last year, Facebook launched Checkout with Instagram, a feature that allowed a select number of brands to sell products directly via Instagram. Facebook has expanded that feature to more and more brands since its launch. The company also rolled out Facebook Pay, which allows send or receive money via Facebook or purchase items directly from brands. This year, the company also launched Instagram Shops and Facebook Shops. Those features allow brands to have virtual storefronts where users can browse their catalogs of products. In July, the company added a Shopping Tab to the homepage of the Instagram app. It followed that with a corresponding Shopping Tab for the Facebook app, making it easier for users to find brands catalogs on the blue app. And on Monday, Instagram announced that it plans to test out shopping features on Reels , it's short-video competitor to TikTok. Most companies with Facebook Shops do not sell directly on the apps. Rather, users can browse their goods. If they are interested in making a purchase, they can tap on "Checkout on Website" and be taken to the brands website to complete the purchase. For the brands that do use Checkout with Instagram or Facebook Pay, users can buy products directly through Facebook's app. In those cases, Facebook charges the merchants a small percentage to process the transaction, but otherwise, the merchant keeps the vast majority of the sale. For Facebook, this push into e-commerce, or social commerce as it is more specifically called, is not the start of a new business or revenue stream for the company. Rather, the purpose of this expansion is to encourage brands to advertise even more than they already do. Advertising accounted for nearly 98% of Facebook's revenue in the company's latest quarter. Ads are the lifeblood of the company. With shopping, the idea is that if brands can showcase their products on Facebook and complete sales on Facebook, then they will advertise more on Facebook. Shopping carries the added advantage of being yet another thing for users to do when they go on Instagram or Facebook. This is part of a goal to make the app stickier. Already, Facebook claims more than 3 billion monthly users across its various apps and services. Further growth will only get more difficult, so Facebook needs to focus on its average revenue per user, or ARPU. To do that, Facebook needs to show more ads to users and charge more for the ads it shows. "Frankly, commerce on Facebook is a product that benefits their advertiser base, their user base and, ultimately, the market in general," said Ron Josey, equity research analyst at JMP Securities. "But the opportunity is on advertising more than anything else." Year-to-date, Facebook is up 28% while Shopify is up 165%. BigCommerce's stock more than tripled in its market debut Aug. 6 and is about flat since then. The three companies stand to make gains with Facebook having laid down enough of a foundation in 2020 to enable it to slice off a piece of this year's holiday shopping sales. "It's not a coincidence that it's happening now as we prepare for the holiday season," Josey said. "From a timing perspective, now's the time to do it." Already, social commerce has taken off in other parts of the world. In China, for example, Tencent's WeChat is frequently used for shopping as are Alibaba's Taobao, Pinduoduo and JD.com. There, social commerce already represents approximately 11% of e-commerce sales, according to Global X, an ETF provider. By comparison, social commerce makes up approximately just 5% of U.S. e-commerce sales, according to Global X. But as Facebook pushes into this space, those figures could start to increase. "We wouldn't be surprised to see U.S. penetration reaching the same levels exhibited by China over the next three to five years," said Pedro Palandrani, research analyst at Global X. Shopify and BigCommerce opportunity Facebook's two most notable partners are Shopify and BigCommerce. Both companies enable their clients to set up online stores, and once set up, those merchants can plug their catalogs and inventories major online marketplaces. This includes Amazon , eBay and Walmart , and now, it also includes Facebook and Instagram. "We think [Facebook is] a very valuable channel for merchants to reach their audience," Satish Kanwar, Shopify vice president of product, told CNBC. "So much of their audience are already engaging with brands inside of places like Instagram. It's such a natural place to make shopping richer and more seamless." For Shopify and BigCommerce, connecting with Facebook is one part of both companies' overall strategies to enable their clients to sell products through as many online retailers as possible. "These tight integrations are a core part of our strategy," BigCommerce CEO Brent Bellm told CNBC. Merchants are able "to sell on the top marketplaces, on the top social networks, on the top advertising channels and through your point of sale." In particular, clothing brands have been quick to start selling directly via Instagram. This includes brands like Nike and Adidas , H & M , Abercrombie and its brand Hollister. Fashion, clothing and athletic wear are among the products that make the most sense to sell via Facebook to start due to the visual strengths of the social network. Not only can brands post photos on Instagram of their products being worn and tag them directly within the post, but Instagram is also a strong medium for storytelling. That allows brands to build a narrative around their products. That's key for brands that are trying to sell on Instagram due to a challenge that Facebook faces when it comes to e-commerce: it's users aren't there to shop. Unlike Amazon, Ebay and Wal-mart users, Facebook users are on there and Instagram to see what their friends and the influencers who they follow are doing. For e-commerce to succeed on Facebook, the company is going to have to increase the level of shopping intent among its users. Creating tabs for shopping on both Instagram and Facebook is a good step toward this, said Shopify's Kanwar. "The opportunity with a shopping tab is really to encourage and have more consumers start their shopping journeys with the intent of looking for and buying products," Kanwar said. Meanwhile, merchants have to pull their own weight by being savvy marketers on Facebook, said Bellm of BigCommerce. Simply opening a shop and listing your catalog is not enough, Bellm said. These brands have to maintain a strong and active presence and engage with their followers, he added. "Can you just put up a store and expect people to suddenly land there without marketing behind it? No," Bellm said. "This is for savvy marketers who know how to market on Facebook and Instagram." As consumers start to ramp up their holiday shopping in the coming weeks, the potential for e-commerce on Facebook will really come into the limelight. "I don't think there's another company out there that can better target a brand or company's product to a user and then also drive that targeting all the way through," Josey. "To be able to do that from an end-to-end profit is pretty differentiated if you're Facebook."

Facebook co-founder and CEO Mark Zuckerberg testifies before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill October 23, 2019 in Washington, DC. Zuckerberg testified about Facebook's proposed cryptocurrency Libra, how his company will handle false and misleading information by political leaders during the 2020 campaign and how it handles its users’ data and privacy.

Chip Somodevilla | Getty Images News | Getty Images

Facebook has typically been a place where brands go to advertise their products. But over the past two years, the company has released a number of new features that have made it possible for brands to not only advertise, but also sell products directly through its apps.

As sales increase, that could also benefit a number of brands that are moving early to adopt Facebook's new technology.