In the world of tech investing, the best stocks don’t always get the most attention. While high-flying dot-com startups get loads of press and perform well in the short term, it’s often the “vanilla” companies with established business models that make better long-term investments.
The difference can be illustrated well by two of Canada’s top tech stocks: Shopify (TSX:SHOP)(NYSE:SHOP) and Kinaxis (TSX:KXS). Shopify is a massively hyped e-commerce stock whose main product is growing by leaps and bounds. Kinaxis is a much less famous company that develops “boring” but profitable supply chain management software.
The contrast couldn’t be starker. Here we have a stock that reaps a veritable harvest of media attention and hype on the one hand; and on the other, we have a company that delivers steady profits with an established business model.
Which is the best one for your portfolio?
First, let’s take a look at how they’ve done year to date.
Both Shopify and Kinaxis are broadly up this year, while being down with the rest of the TSX in the past week. However, Shopify’s recent sell-off merely tracked the broader seven-day TSX losses, while Kinaxis shares fell more dramatically. Between September 27 and October 10, Kinaxis shares lost 15% of their value. They have since recovered somewhat, but are still down significantly from their 12-month highs.
Shopify has got Kinaxis beaten on revenue growth. Whereas Shopify’s revenue growth is up about 62% year over year, Kinaxis’s is only up some 18%. In terms of bottom-line earnings, Kinaxis has actually suffered a decline. However, as we’re about to see, looking at earnings actually makes Kinaxis seem better than Shopify overall.
The one big thing Kinaxis has that Shopify doesn’t is consistently positive bottom-line earnings. The company has posted positive earnings in three out of the past four years. On a fiscal-year basis, earnings are also growing steadily; although, if we look at it quarterly, the most recent income statement posted a 24% decline.
Shopify does not have a history of positive earnings. The company has posted net losses in all of its fiscal years since going public and its net losses are growing. The company has been widely criticized for burning through cash, and that trend shows no signs of slowing down. While the company is growing revenue quickly, it is growing its costs just as fast. This calls into question whether the company will achieve profitability in the near future.
Shopify and Kinaxis are at opposite ends of the tech spectrum. On one end, we have a media darling with red-hot growth but no earnings to show for it. On the other end, we have a “plain Jane” stock with much more solid financials. In the end, investors considering either of these stocks will have to decide whether they’re after quick speculative returns or steady long-term performance. For the former, Shopify may be the better pick; for the latter, Kinaxis may be a stronger choice.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Kinaxis and Shopify are recommendations of Stock Advisor Canada.