Top Picks for Current Investment: Amazon versus Shopify
In the world of digital commerce, Amazon (AMZN -0.02%) and Shopify (SHOP -3.41%) have been two titans, consistently outperforming the S&P 500 over the last decade. However, these two powerhouses approach the e-commerce landscape differently.
Amazon has championed integration for an unparalleled shopping experience. The tech giant has verticalized e-commerce, becoming the epitome of efficiency for shoppers. Meanwhile, Shopify aspires to be the best software and payment layer for third-party e-commerce brands.
As we bid farewell to 2024, the question arises: which stock stands out as the top pick for investors? Let's dive deeper into these two, transformative companies in the e-commerce sphere.
Shopify: Focusing on Core Competencies
The pandemic catapulted Shopify’s growth, with revenue surging by 100% year over year in 2020. This incredible success prompted the company to venture into new services beyond e-commerce software and payments. These ventures included logistics networks, robotics, and even cryptocurrencies. In essence, Shopify was eager to offer a plethora of e-commerce and payment-related services to its customers.
The strategic shift eventually led Shopify to spread its wings too thin, moving away from its core competencies. In 2022 and 2023, Shopify recognized this error and tactically shrank its focus. The company refined its objectives to focusing on core software and payments offerings, rallying to improve both profitability and business coherence.
This new approach has been nothing short of fantastic. Shopify has enjoyed a steady revenue growth of 26%, inching towards the $2 billion milestone last quarter. Profitability is soaring, with a gratifying 19% free cash flow margin, a remarkable improvement from past negative figures. The company anticipates another 26% revenue growth in the upcoming fourth quarter.
By leveraging its dominant position as the e-commerce software powerhouse, Shopify has the opportunity to sail on the global e-commerce tide, reaching new heights over the next decade. While 26% revenue growth may not be sustainable, Shopify has seemingly discovered the sweet spot of generating profitability while nurturing the business, a delight for shareholders.
Amazon: Winning Through Efficiencies
Complaints are not uncommon from e-commerce merchants regarding Amazon, but still, they continue to return to the giant's platform. Why? Amazon's logistics and warehousing functionalities are unmatched, and its customer reach is unparalleled.
Amazon's North American retail sales grew by 9% year over year in the last quarter, reaching an impressive $95.5 billion. Revenue growth was even more exponential in international markets, growing at an annual clip of 12%. This growth was propelled by robust advertising revenue, expanding at a 19% annual rate, and outpacing other business segments.
Amazon currently holds an estimated 40% market share in the United States, maintaining its dominant position in the e-commerce landscape despite the emergence of competitors such as Shopify. Like Shopify, Amazon has trimmed costs and improved its profit margins, reaching an almost 10% operating margin and boasting $43 billion in free cash flow.
Though Amazon's growth won't be as fast-paced as Shopify due to its colossal $620 billion earnings base, there's still plenty of room for expansion, coupled with continued improvements in profitability.
The E-commerce Kingmaker: Which Stock?
Comparing Amazon and Shopify calling for a more nuanced analysis. Despite trimming costs and refocusing objectives, both companies evidence similar growth trajectories, with an emphasis on efficiency and profitability.
Amazon, as a more diversified business, targets various stages in the e-commerce supply chain, while Shopify takes a more targeted approach with fewer percentage points of the market residing within its grasp.
Looking beyond their financials, Shopify trades at a market cap of $142 billion and has a forward price-to-earnings ratio (P/E) of 86, compared to Amazon's more palatable 41.
While Shopify may edge out Amazon in terms of growth projections for the subsequent five years, its valuation may not justify a double-digit forward P/E ratio compared to its peer. In light of this, Amazon seems like the better investment option at current prices.
In the realm of finance, investors might be interested in the potential returns of both Amazon and Shopify. Despite Shopify's remarkable 26% revenue growth and improvement in profitability, its current market cap and forward P/E ratio could make Amazon appear more attractive as an investment option.
Investors looking to diversify their portfolio might find value in Amazon's approach to e-commerce, which spans various stages of the supply chain and boasts an unmatched reach and logistics capability. This diversification, coupled with its more reasonable valuation, could make Amazon a compelling choice for those seeking a balance between growth and value.
