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Can Facebook's Shopping Endeavor Disrupt E-Commerce Market?

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Facebook’s (FB - Free Report) Instagram is reportedly set to roll out a shopping app. Per The Verge, the app, which will most likely be named IG Shopping, is in the test phase.

Facebook is increasingly trying to diversify its revenue streams from a traditional ad-based business model. The company has been ramping up efforts to bring in new features to extend its offerings in various categories including e-commerce.

Instagram’s entry into the rapidly growing e-commerce market, particularly retail that is expected to reach $4 trillion by 2020 per emarketer, is a step toward that direction.

Notably, Instagram now has more than 1 billion monthly users. It was also one of the most downloaded apps on both iOS and Android in the first half of 2018. Moreover, it has nearly 25 million business profiles.

Facebook, Inc. Revenue (TTM)

Facebook, Inc. Revenue (TTM) | Facebook, Inc. Quote

Can AR Help Instagram Stand Out From the Crowd?

As more and more business owners are increasingly turning to social platforms to increase brand awareness and attract more customers, Instagram’s separate shopping app has significant growth prospects.

We believe a dedicated shopping app will boost Facebook’s chances to rapidly penetrate the fast growing e-commerce market and challenge players like Amazon (AMZN - Free Report) , MercadoLibre (MELI - Free Report) and Etsy (ETSY - Free Report) .

The e-commerce market helps businesses directly connect with customers. Platforms like Shopify (SHOP - Free Report) , a Zacks Rank #3 (Hold) stock, offer tools for merchants to promote their businesses.

The space is also becoming increasingly competitive as companies are using technologies like augmented reality (AR). Facebook, which has a Zacks Rank #5 (Strong Sell), has started to incorporate AR technology in its advertising space. We believe the usage of AR in the upcoming shopping app can act as a differentiator in terms of providing better customer experience.

Amazon Still Dominates the E-Commerce Market

Amazon, a Zacks Rank #1 (Strong Buy) stock, is considered a pioneer in the e-commerce market. You can see the complete list of today’s Zacks Rank #1 stocks here.

Its Prime service continues to offer an enhanced experience with the help of exciting discounts, free two-hour grocery delivery facilities, faster shipment services, expanding lineup of movies, audio and video portfolio, Prime Wardrobe and now Prime Book Box.

Recently, Prime members in the United States started receiving unlimited free two-day shipping on over 100 million different items. The company also offers 5% cash back benefit to Prime members who use Amazon Prime Rewards Visa card while shopping at any Whole Foods store.

Further, Amazon’s effort to expand its Prime business globally is another positive for the membership base of the business. Recently, Amazon rolled out its monthly Prime membership plan in Canada for $7.99 per month.

Additionally, the company launched Prime free same-day delivery in select cities in Italy and Spain; Prime Music and Prime Reading in Italy, Spain, and France and Prime Student in Japan during the second quarter.

Further, Amazon launched AR View, which enabled customers visualize online products in their living space via their smartphone cameras.

Notably, all these endeavors will continue to aid Amazon to improve its customer base and encourage Prime membership.

Despite Instagram’s significant user base, we believe Facebook will find it extremely difficult to challenge Amazon in this market.

How are Other Players Placed?

Instagram’s entry into the e-commerce segment is expected to put pressure on Etsy, a Zacks Rank #3 stock, which has both online and offline presence in various countries.

Even though brick-and-mortar stores provide better experience, millennial users mostly prefer brands like Instagram, which provides a differentiated experience. This bodes well for Facebook.

Moreover, Instagram is expected to have an advantage over MercadoLibre, which currently has a Zacks Rank #4 (Sell). MercadoLibre is struggling due to rising shipping costs, price hikes by its postal partners and mounting expenses, which have put margins under significant pressure.

Facebook has a solid user base in Latin America, MercadoLibre’s primary market. We believe the user base strength along with growing usage of AR and artificial intelligence (AI) will provide Facebook a competitive edge over MercadoLibre in the e-commerce market.

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