Shopify Inc (TSX:SHOP) and Kinaxis (TSX:KXS) are two of Canada’s biggest tech companies. SHOP produces software that lets people host their own online stores, while Kinaxis develops supply chain management software. The two companies are quite different, but they have similarities. For one, both companies develop AI software and have been rising with this year’s “AI gold rush.” For another, they both develop software that is sold on a “subscription” model, meaning that there is some similarity in their business structures. In this article, I will explore Shopify and Kinaxis side by side so you can decide which one is the better buy.
The case for Shopify
The biggest advantage that Shopify has over Kinaxis is in marketing. Shopify counts among its customers some very large online businesses, such as Jeffree Star Cosmetics and Colour Pop. These are companies that do millions of dollars in sales each year. These big accounts are valuable because the more they grow, the more Shopify’s share value grows. Shopify’s subscription plans give it a monthly fee plus a small cut of all sales. As Shopify’s big corporate users scale their businesses, Shopify grows along with them. This is a path to growth that does not require any spending on marketing or even much spending on anything (server costs may increase a little, but that’s it). So, it’s a very big advantage to have as sales potential grows in the pipeline.
The case for Kinaxis
The case for Kinaxis comes down to growth, profitability, and valuation.
A couple years ago, a person would have said you were out of your mind if you said Kinaxis was growing faster than Shopify. In 2020, SHOP grew its revenue at 86% – KXS has never had that kind of growth. However, KXS actually grew faster in the most recent fiscal year, when its revenue increased by 46%. Shopify, in the same period, only grew 21%. So, Kinaxis took the cake on growth. It was a similar story on profitability. In its most recent quarter, KXS had positive gross profit, operating income, and net income. The only one of these metrics that was positive in Shopify’s case was gross profit. So, Kinaxis was more profitable than Shopify in 2022.
Finally, Kinaxis has a much cheaper valuation than Shopify, trading at:
- 86 times earnings.
- 10 times sales.
- 153 times operating cash flow.
It’s a pricey stock, without a doubt, but Shopify currently trades at 1,759 times analysts’ estimate of next year’s earnings, while having about the same price/sales ratio as KXS. So, Kinaxis is overall cheaper – despite being expensive in absolute terms.
The verdict
Given the choice between Shopify and Kinaxis, I would most likely go with Kinaxis. SHOP has a lot of things going for it, most notably its big celebrity vendors, but its cost discipline hasn’t been very good lately. It was profitable in the past, but it isn’t profitable now, primarily to big increases in spending. Kinaxis is growing its revenue even faster than Shopify is, and still manages to be profitable. So, I prefer KXS stock over SHOP.
