In this article, I analyze Amazon (NASDAQ: AMZN) and Shopify (NYSE:SHOP), to see which is a better buy. Shopify stock has outpaced Amazon, returning 72% year to date vs 50% for Amazon.
Both are North American e-commerce giants, but Amazon dwarfs its Canadian rival. While e-commerce names may appear to be safe buy-and-hold investments, a closer examination of their fundamentals and pricing reveals a clear winner.
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Amazon
Amazon lost money in 2022 after eight years of prosperity, driven down by investments like its 20% share in EV producer Rivian, whose value plummeted in 2022. There’s a lot of noise affecting Amazon shares, thanks to investor punishment over the previous year or so and its skyrocketing valuation during the pandemic. After accounting for these effects, a bullish outlook appears to be appropriate for the long term.
To deal with its $2.7 billion loss in 2022, Amazon implemented a slew of cost-cutting measures, including suspending experimental initiatives, laying off 18,000 employees, and halting grocery store expansion. Those changes could benefit the corporation in the long run because 2022 served as a wake-up call: even tech titans aren’t untouchable.
However, when we examine Amazon’s value in relation to its history, it becomes evident that the bull thesis may take some time to play out. On the one hand, growth and momentum investors have been smitten with the e-commerce giant for years, particularly during the pandemic, when online shopping received a significant boost.
Value investors, on the other hand, would argue that Amazon has spent much of its publicly traded life overpriced. The good news is that the company appears to be undervalued on some metrics. For example, it is now trading at a price-to-sales (P/S) ratio of roughly 2.5, compared to a five-year mean P/S of about 3.6.
Furthermore, Amazon’s stock and value have dropped significantly since the pandemic, when it traded at a P/S ratio of 5 or higher. Furthermore, it is trading slightly above its pre-pandemic stock price but below its pre-pandemic P/S of around 4 to 4.5, indicating a long-term bullish outlook.
Shopify
A comparison of Amazon and Shopify stock price movements reveals parallels. There is, however, a significant difference between them. Although Shopify made a profit in 2020 and 2021, most likely as a result of the pandemic, it became significantly more unprofitable in 2022 than it was before the outbreak. Overall, SHOP’s fundamentals and valuation point to a gloomy outlook.
Shopify, like Amazon, was hammered by its investments in 2022. For example, in the second quarter alone, it experienced a significant $1 billion non-cash loss due to a write-down of its equity interests, accounting for nearly all of that period’s deficit. Unfortunately, financial losses may be hiding a greater problem.
In 2022, Shopify’s R&D and selling, general, and administrative expenses were $1.5 billion (up 43% year on year) and $1.7 billion (30% growth), respectively. However, its gross profit increased only 11% from 2021 to 2022, while revenues increased only 21.4%.
Finally, despite its drop in valuation, Shopify stock still appears wildly overvalued at a P/S ratio of 13.8 in comparison to the stronger, larger Amazon. Shopify’s average P/S for the previous five years is 31.1, indicating that it has been overvalued for years.
Conclusion
Investor sentiment has long been a factor in Amazon and Shopify values. However, it appears that investors have priced Shopify as if it were the next Amazon rather than on its own merits. As a result, Amazon appears to be the clear winner.
Unfortunately, Amazon may face stock market challenges in the near future as a result of the prospect of a recession, but the company has staying power and should eventually come roaring back. The important caveat is that a lower entry price may emerge, but Amazon appears inexpensive even at current levels when considering its long-term potential and historical pricing.
