Can Shopify (TSX:SHOP) Replicate Amazon’s (NASDAQ:AMZN) Growth Story?

Shopify (TSX:SHOP)(NYSE:SHOP) stock has more than doubled in three months, as investors believe it to be the next Amazon (NASDAQ:AMZN). Can Shopify replicate Amazon’s growth story?

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Shopify (TSX:SHOP)(NYSE:SHOP) has been the talk of the town, as it became the highest-valued stock of the Toronto Stock Exchange. It became the preferred platform for most retailers who rushed to go online after the COVID-19 pandemic closed many physical stores. Some investors viewed Shopify as the next Amazon (NASDAQ:AMZN) and purchased its stock, even at a high valuation. Now, the biggest question is whether Shopify can replicate Amazon’s growth story.

Shopify vs. Amazon: Similarities and differences  

Both Amazon and Shopify have one thing in common: they both want to make their products easy to use and cost effective. However, they are different in their ways. Amazon is a consumer-centric platform, whereas Shopify is a merchant-centric platform. Amazon has its consumer products it sells on its e-commerce platform while offering its platform to third-party sellers. Shopify is a pure-play e-commerce platform which only caters to third-party sellers. 

For retailers, partnering with Amazon is a double-edged sword, as the company itself is a retailer and, therefore, their competitor. Shopify has no consumer goods of its own, which makes retailers feel safe about competition. The two companies also differ in their market opportunities and challenges.

When Amazon started back in 1994, it had no competitors and no market. People were not used to buying products online. Amazon faced the challenge of creating a whole industry by itself with no competition in its home market. It was only until 1998 when Alibaba came up with its e-commerce platform in China that Amazon saw the competition, and in the foreign market.

Shopify has entered an already established e-commerce market, which is well accepted by consumers and retailers. But it faces stiff competition from Amazon and other smaller players like Wix and WooCommerce.    

Stock valuation   

Shopify’s revenue rose 73%, 59%, and 47% in the last three years, as more merchants subscribed to its platform and used various merchant solutions like payment and shipping services. Even though Shopify’s primary business is subscription-based Software-as-a-Service (SaaS), it earns over 60% of its revenue from merchant solutions, which is a transaction-based business.

Merchant solutions have a low operating margin, as it includes the cost of third-party associates, with which it has a revenue-sharing agreement. Hence, Shopify’s business model has a higher turnover and lower profit. Even Amazon has a net profit margin of less than 5% but revenue of $241.5 billion.  

Hence, the correct way to value Shopify is through its sales growth. Before the pandemic, Shopify stock was trading at 27 times its revenue per share, four times more than Wix’s valuation of 6.7. Shopify’s valuation came on the back of its 50% revenue growth, which is higher than Wix’s 26% growth rate. 

But the stocks of Shopify and Wix doubled during the pandemic-driven lockdown, sending their valuations to 89 times and 14 times their revenue, respectively. This threefold increase in Shopify’s valuation shows that investors expect Shopify’s revenue to grow 150% this year.  

Can Shopify be the next Amazon?

However, traditional valuation methods do not work for tech stocks. There is a concept of disruptive technology where new technology can break the market of an already established player. It happened with BlackBerry back in 2009, when Apple launched its iPhone and changed the way mobile devices work. BlackBerry, which once owned 50% of North America’s mobile device market, exited the hardware market by 2014.  

Shopify is still behind Amazon in many aspects, such as global outreach, last-mile deliveries, and customer popularity. Unlike Apple, Shopify does not have disruptive technology. But it has the potential to be the second best in the e-commerce space. Shopify is building its ecosystem of end-to-end retail solutions for both online and physical stores. It has the potential to replicate Amazon’s success in the coming decade. But investors have already priced the stock for the next 10 years. 

Shopify is a good growth stock, but its inflated stock price bubble could burst if it fails to meet investors’ expectations. If you haven’t bought the stock yet,  just wait and watch. The stock could move in the strong double digits after its second-quarter earnings are released in early August.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Puja Tayal has no position in any of the stocks mentioned. David Gardner owns shares of Amazon and Apple. Tom Gardner owns shares of Shopify and Wix.com. The Motley Fool owns shares of and recommends Amazon, Apple, Shopify, Shopify, and Wix.com. The Motley Fool recommends BlackBerry and BlackBerry and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon.

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