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Better Buy: Shopify (TSX:SHOP) vs. Air Canada (TSX:AC)

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Two stocks on the TSX have recently been moving in the opposite direction to their general trend throughout the pandemic. The shares of a company that has been facing losses throughout the pandemic are on the rise, while the stock of a company that made a lot of money during the pandemic is declining.

Air Canada (TSX:AC) has appreciated by almost 21% since the start of the year amid the hopes of a government bailout package. Shopify (TSX:SHOP)(NYSE:SHOP) is down by almost 28% from its valuation in February, as it expects growth to normalize this year.

Both stocks enjoy a good momentum but are volatile. While both stocks trading on the TSX are volatile, one of the two volatile equity securities could be a better investment than the other. I will discuss the darling tech stock and the battered airline stock to help you make a more well-informed choice about which could work better in your portfolio.

Air Canada’s situation

Air Canada stock is rallying over the hopes of a recovery in a post-pandemic world. Unfortunately, the hopes fueling its growth are not backed by fundamentals. There is a demand for air travel, and Air Canada is undoubtedly well equipped to supply. However, travel restrictions are preventing the market dynamics to realize their potential for the airline fully.

A lift on restrictions for air travel could boost demand, allow Air Canada to operate at full capacity, and send its stock soaring. At least, that is what the airline’s investors might be hoping for. Business travel is the real money maker for airlines and responsible for most of the industry’s profits.

Business travel might no longer be as necessary for the post-pandemic economy due to virtual meetings’ newfound efficiency. It is possible that business travel demand might not reach pre-pandemic levels for several years, making a massive dent in AC’s potential profits.

Even if its revenue recovers, its rising debt is a significant problem for the airline. AC ended 2020 with $5 billion in net debt and $8 billion in liquidity. Its new debt is increasing the airline’s interest burden. The airline may struggle to return to profit for several years.

Shopify and its recent decline

Shopify has been a darling stock for Canadian investors but has become very volatile in recent months. The company’s valuation keeps falling, albeit expectedly, due to its growth rate normalizing. The pandemic came along to accelerate its revenue growth from 47% in 2019 to 86% in 2020. This rapid acceleration drove its valuation 170% last year.

It seems that the pandemic may finally begin fizzling out, and its effects on the economy are fading. The growth rate is expected to normalize to 50%. The first quarter also typically sees a seasonal weakness for the company. These factors are all combining to create a negative momentum for the e-commerce giant.

However, Shopify will likely return to rally with massive gains, as shopping momentum begins picking up. Shopify is not a company with a massive debt to repay. The company was making losses before the pandemic, but the pandemic-fueled growth finally pushed the company into profit for the first time.

The pandemic’s conducive business environment for e-commerce led to many retailers and customers moving to online buying and selling. Shopify has become the platform of choice for most small and medium enterprises migrating to the e-commerce industry.

Foolish takeaway

Air Canada is enjoying a positive momentum on the stock market without the fundamentals to back its rise. Shopify’s valuation currently is declining due to several factors, but it has the fundamentals to support excellent long-term returns.

While Air Canada could provide investors with short-term upside, Shopify ultimately seems like the better long-term play for wealth growth.

Speaking of investing in Shopify…

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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.

Fool contributor Adam Othman owns shares of Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.

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