Morgan Stanley expects an area of tech to boom into a $5 trillion opportunity and names 3 stock picks

Published Mon, May 8 20238:09 PM EDT

E-commerce is set for a boom, according to Morgan Stanley, which predicts that the industry will be worth $5 trillion by 2027. That's an increase of 8% at a compound annual growth rate from $3.4 trillion in 2022, the bank said in a recent report. "We largely saw a focus on profitability over growth emerge through 2022," Morgan Stanley analysts wrote. "We see a more rational investment and customer acquisition stance supporting our case around marketplace monetization and profitable growth potential." Morgan Stanley picked stocks to play the boom, choosing them based on their "outsized growth potential," market leadership and "attractive" trading multiples relative to history, among other factors. It named eight overweight-rated stocks in the report, three of which are the bank's top picks. They are Amazon , Alibaba and Argentinian company MercadoLibre . Here's what the bank said about each stock. Amazon Morgan Stanley noted that although Amazon has around 37% of the U.S. e-commerce market, it has captured only 9% of U.S. retail sales. That indicates it has room to grow as consumers continue to shift to online shopping, according to the bank. "When it comes to core consumer offerings (depth of inventory, guaranteed speed of shipping, incremental offerings beyond eCommerce) and overall volume of business, Amazon continues to lead peers," it wrote. The bank is optimistic about the company's cloud business AWS, predicting it will grow around 19% year on year in 2024. "Amazon's high-margin businesses continue to allow Amazon to drive greater profitability while still continuing to invest," the bank's analysts wrote, adding that cloud adoption is reaching an "inflection point." It gave Amazon a price target of $150, implying 42% upside from Friday's closing price of $105.66. Alibaba The market has underappreciated Alibaba's "leverage to a consumption recovery" in China, Morgan Stanley said. "Valuation remains attractive. At current levels, we think the stock underrepresents the value of cloud, other business segments and investments," the analysts added. "Strong cash flow-generating capabilities and continued share buyback could also provide downside support." The bank added that the e-commerce giant is a key beneficiary of the country's easing regulations. "For the past 1-2 years, Alibaba has been in focus, so we think it could outperform other Chinese Internet stocks as the [regulatory] environment eases," the bank said. It gave Alibaba a price target of $150, implying 80% upside from Friday's closing price of $83.22. MercadoLibre Morgan Stanley said it sees MercadoLibre as a "share gainer" in a region that still has a "multiyear eCommerce penetration opportunity." It said MercadoLibre is the leading marketplace in Latin America, and predicts the firm's regionwide share will grow by 2 percentage points to 31%, supported by its logistics investments and benefits of scale. "MELI is a LatAm eCommerce and fintech leader. We see the company well positioned to capture the secular growth opportunities on both fronts," the bank said, adding that the firm can profit from an expansion of services such as adverstising and logistics. It gave MercadoLibre a price target of $1,770, or 42% potential upside. — CNBC's Michael Bloom contributed to this report.