Better Buy: Shopify Stock vs. Aritzia

Beaten-down TSX companies such as Shopify stock are trading at a deep discount to consensus price target estimates.

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Women's fashion boutique Aritzia is a top stock to buy in September 2022.

Source: Getty Images

After delivering outsized gains to investors for several years, growth stocks grossly underperformed the market in 2022. But the ongoing stock market volatility allows investors to take advantage of depressed valuations and buy the dip.

Two popular growth stocks on the TSX include Shopify (TSX:SHOP) and Aritzia (TSX:ATZ). While Shopify stock is down 72% from all-time highs, shares of Aritzia have slumped 30% since the start of 2022. Let’s see which beaten-down TSX stock is a better buy today.

Shopify stock

Despite the massive pullback in Shopify stock, it has returned a staggering 1,790% to shareholders since its initial public offering in 2015. After years of exponential growth, Shopify is now wrestling with a deceleration in the top line due to a combination of inflation, interest rate hikes, and the reopening of economies.

In order to get through an uncertain macro environment, Shopify recently increased the prices of its monthly subscription plans by 33% and annual subscription plans by 50%. Shopify also reduced its workforce by 10% and lowered its cost base to improve profit margins.

The Canadian e-commerce giant penetrated 10% of the e-commerce market south of the border, which is quite exceptional. According to a research report from Statista, the U.S. e-commerce market is forecast to widen to US$1.7 trillion by 2027 from US$905 billion in 2022.

Shopify increased its gross merchandise volume by 12% year over year to US$197 billion in 2022. Comparatively, its sales were up more than 25% year over year.

Analysts expect Shopify to increase its sales from $7.62 billion in 2022 to $10.84 billion in 2024. Valued at a market cap of $75 billion, Shopify stock is priced at seven times 2024 sales, which is quite steep given the company is forecast to report an adjusted loss this year.

However, analysts remain bullish on SHOP stock and expect it to gain more than 30% in the next 12 months.

Aritzia stock

Founded almost 40 years back, Aritzia is a vertically integrated luxury design house. The Canadian retail brand has established a strong presence in the United States and now aims to gain traction in other global markets on the back of thriving e-commerce sales.

Aritzia has increased its sales from $743 million in fiscal 2018 to $1.49 billion in fiscal 2022 (ended in February), indicating annual growth rates of 19%. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) surged 22% annually to $289 million in this period.

Due to the rising cost of labour, the company’s gross margins fell by 330 basis points, while the EBITDA margin fell by more than 500 basis points in the January quarter.

While sales were up 38% year over year in fiscal Q3, revenue generated from the United States was up 58% due to strong brand awareness and robust comparable store sales. Comparatively, total e-commerce sales were up 36% in the quarter.

Valued at a market cap of $4.6 billion, Aritzia is forecast to increase sales from $1.49 billion in fiscal 2022 to $2.46 billion in fiscal 2024. It’s priced at less than two times forward sales and 20 times forward earnings, which is very reasonable. ATZ stock is currently priced at a discount of 50% compared to consensus price target estimates.

The Foolish takeaway

While both Shopify and Aritzia are solid long-term bets, the latter is trading at a much better valuation and is the better TSX stock to buy right now.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aritzia and Shopify. The Motley Fool has a disclosure policy.

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