It’s been a tough year for e-commerce stocks. Many companies in the industry have seen their stock prices fall far beyond the overall market.
But the silver lining for prudent investors is that the sector-wide decline offers plenty of opportunities to acquire stakes in major e-commerce companies, including: Shopify (shop 6.52%) When Etsy (ETSY 6.13%) at a discount. But which one to buy now?
Shopify vs. Etsy Business Model
Etsy and Shopify are both ecommerce companies, but their business models are very different. Etsy operates an e-commerce his marketplace focused on matching sellers and buyers for craft and vintage items. For entrepreneurs and small businesses, it offers a popular platform to sell their goods globally. Etsy charges sellers fees for services such as transactions, payment processing, and advertising.
Shopify also aims to help entrepreneurs succeed by making it easier for them to sell their products globally. However, instead of managing its own marketplace, it provides users with e-commerce tools and services such as online storefronts, payment platforms, and shipping. Software as a Service (service) Make it seamless for models, merchants to sign up and make payments.
Unlike Etsy, Shopify is not directly responsible for customer acquisition. Merchants should use the tools Shopify provides to attract customers. But the advantage of such an arrangement is that the seller fully owns the customer and Shopify primarily acts as the infrastructure provider for him.
Comparing the take rates of the two companies, the difference in business models is clear. In the second quarter of 2022, Etsy generated $585 million in revenue by realizing his $3 billion gross merchandise sales on the platform. Meanwhile, Shopify made him $1.3 billion in revenue against his $46.9 billion gross merchandise value.
So Etsy’s take rate was 19.3% compared to Shopify’s 2.8%. Differences in take rates can partly explain why Etsy was profitable during Q4 while Shopify reported significant losses.
Which company has good prospects?
The e-commerce industry is under tremendous pressure as the majority of shoppers are returning to their pre-pandemic habits. Moreover, high inflation, recession fears and geopolitical tensions are impacting consumer spending. Suffice it to say that both Etsy and Shopify will continue to face challenges in the coming months.
But in the long term, five to ten years, both companies have great opportunities to grow their businesses. Managing Etsy We estimate that we are tapping less than 3% of the total $466 billion covered market.
Similarly, Shopify (despite its size) still has room to grow. The company’s platform drives less than 2% of US retail sales, and the company is aggressively expanding into international markets. Global e-commerce sales in 2021 reached his $4.9 trillion. .
Both companies have historically enjoyed high growth rates. Over the past five years, Etsy’s revenue has more than sixfold, from his $365 million to $2.3 billion. Shopify did even better, growing revenue almost 12-fold, from $389 million to $4.6 billion.
In short, both companies have tremendous growth runways, but Shopify seems to have the upper hand based on past performance and the broad appeal of its services.
A short discussion on evaluation
The stock prices of two e-commerce leaders have fallen sharply over the past 12 months. As of this writing, Shopify is down about 80% and Etsy is down about 55%.
Unsurprisingly, valuations for both companies are much lower than their historical averages. For example, Shopify’s price-to-sales ratio (PS) is 7.0 at the time of writing, well below its five-year average of 29.8, and near its lowest value for that period. Etsy has 5.9 sales and an average stock price of 10.6 over the last five years.
Shopify may look like a bigger bargain as it trades at steeper discounts than the historical average, but remember that Etsy is actually profitable. Given the strong growth prospects of these companies, both stocks are enjoying premiums across the broader market.
Profitable growth stocks and loss-making super-growth stocks
Overall, there is no clear winner between these two ecommerce leaders. The better choice depends on your individual investment philosophy and risk tolerance.
On the one hand, Etsy is already profitable on a sizable growth runway, even though its performance over the past five years has lagged Shopify’s. Shopify, on the other hand, is the more expensive stock, with a more prominent final record.
Investors looking for a more balanced investment between growth and profitability should choose Etsy, while investors looking for higher risk and higher reward may prefer Shopify.
Lawrence Garr I do not have any positions in any of the stocks mentioned. The Motley Fool recommends Etsy and Shopify. The Motley Fool recommends the following options: A long call of $1,140 in January 2023 on Shopify and a short call of $1,160 in January 2023 on Shopify. The Motley Fool Disclosure policy.