Better Buy: Amazon vs. Shopify Stock

Amazon and Shopify are market leaders in their categories, and both are driving overall growth in the online retail market.

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Amazon (NASDAQ:AMZN) and Shopify (TSX:SHOP) are the market leaders in online retail. Both have seen significant share price declines during 2022’s volatile trading. Which of these e-commerce stocks is the better buy right now? 

Amazon 

Amazon has grown from a small online book retailer to the all-encompassing store that it is today. The company has made this leap with its emphasis on the customer experience. Amazon has worked to improve the customer value proposition at every stage of its development.

The e-commerce giant worked hard to grow its business. Amazon has made billions of dollars in investments in warehouses, logistics, web servers, and other infrastructure. Through effective capital investments, the company has grown its sales from $107 billion in 2015 to $470 billion in 2021.

Furthermore, the massive capital investment makes it difficult for any competitor to enter its market. When people are considering purchasing something online, they consider the delivery window a major selling point. Amazon Prime members can get free two-day shipping on millions of items on its platform, as well as next-day shipping in select cities. Amazon’s lead in this arena is a competitive advantage that could serve it well for years to come.

As revenue grows, Amazon is spreading its fixed costs across a larger customer base. In other words, Amazon’s business model demonstrates scale economies. Indeed, operating profit margins increased from 2.1% to 5.3% between 2015 and 2021.

Of course, Amazon will face headwinds in the near term as consumers reduce online spending. Instead, they are spending money on out-of-home experiences they missed out on during the pandemic. However, consumers are expected to further increase online spending as a percentage of total spending in the coming years.

Because of the fundamental advantages that e-commerce provides, this longer-term trend is unlikely to reverse. Amazon, the world’s largest online retailer, will continue to benefit from this trend.

Shopify

Amazon’s massive scale and infrastructure advantages likely give it a competitive advantage over Shopify and its merchant-platform services model. The tech titan’s hugely successful cloud services business also appears to be on track for even more rapid growth in the long run. However, Shopify offers a more appealing risk-reward profile at current prices.

Shopify’s growth has slowed dramatically as it has exited periods of blockbuster performance and pandemic-related demand tailwinds fade. Following 46% year-over-year sales growth in the third quarter of 2021, Shopify’s Q3 revenue growth this year was only 22%.

Despite the significant slowdown, Shopify still has plenty of room for long-term sales and earnings growth. The company is making efforts to attract new merchant partners, pave the way for increased spending from existing customers, and expand supply chain management and fulfilment services. All these initiatives increase the value of its platform.

Shopify’s share price is down roughly 66% year to date and 75% from its all-time high set in November. The massive sell-off has created an appealing buying opportunity.

Amazon stock has also been punished in response to bearish shifts in the broader market and a slowdown in the e-commerce space, but I believe it will eventually recover and reach new highs.

Still, Shopify’s retreat appears to be overdone. The company’s market capitalization of approximately $65 billion is a small fraction of Amazon’s $1 trillion valuation. Nonetheless, the smaller company may have an easier time moving the needle and delivering big gains for shareholders.

Which of these e-commerce stocks is a better investment?

If you believe in the long-term prospects of the e-commerce industry, you may find investing in both Amazon and Shopify the best bet. Both companies are market leaders in their respective service categories, and both are poised to play significant roles in driving the overall growth of the online retail market.

If you only want to own one of these stocks, choose the one that best fits your risk tolerance and portfolio goals. While both companies valuations are growth-dependent, Amazon’s business is larger, sturdier, and significantly more profitable due to its cloud services segment. However, investors seeking to take on more risk may see potential in Shopify’s business. The smaller e-commerce player may provide higher growth and superior returns.

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 Stephanie Bedard-Chateauneuf has positions in Amazon.  John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.

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