After losing substantial value in 2022 and significantly underperforming the broader markets, technology stocks marked a recovery in the first half of 2023. The moderation in inflation and expectations of an easing monetary policy drove investors towards beaten-down shares from the tech space.
Despite the recent recovery, Shopify (TSX:SHOP) and Lightspeed (TSX:LSPD) stock continue to trade at a discounted valuation from their historical average, providing a good entry point for long-term investors near the current price levels.
Both these Canadian stocks are backed by fundamentally strong businesses with the ability to consistently generate solid volumes and sales. Further, these companies are poised to benefit from the ongoing shift in selling models towards omnichannel platforms and increasing e-commerce penetration.
As both Shopify and Lightspeed offer solid growth potential and are trading cheap on the valuation front, let’s understand which one could deliver higher returns over the next decade.
Shopify
Shopify provides an omnichannel commerce platform to businesses of all sizes. Its stock marked a stellar comeback in 2023, rising about 76% year to date. The solid rally in its share price reflects that the tech giant is well positioned to capitalize on the ongoing digital shift.
Despite a challenging macro backdrop, Shopify impressed with its first quarter (Q1) performance, reflecting strong GMV (gross merchandise volumes), higher revenues, and a growing merchant base.
What stood out was the improvement in its attach rate. Its attach rate increased to 3.04% in Q1 from 2.79% in the prior-year quarter. The improvement in the attach rate reflects that an increasing number of merchants are buying Shopify’s multiple solutions.
Furthermore, Shopify is focusing on an asset-light model to achieve sustainable profitability. It announced the divestiture of its logistics assets, removing the concerns around margins and higher capital requirements to build its logistics network. Also, the company announced significant job cuts to reduce costs and drive efficiency.
Overall, Shopify’s growing GMV, improvement in attach rate, innovative products, and asset-light business model augur well for growth. Despite the recent rally in its price, shares of Shopify are trading at the next 12-month (NTM) enterprise value/sales ratio of 10.8 — less than half of its pre-pandemic levels, making it an excellent stock near the current levels.
Lightspeed
Lightspeed offers cloud-based solutions to small- and medium-sized businesses that enable omnichannel commerce. Like Shopify, Lightspeed is also likely to benefit from the digital transformation and increased spending by retailers and restaurant operators on technology to modernize their legacy POS (point-of-sale) platforms.
However, unlike Shopify, Lightspeed stock has failed to participate in the tech rally. Its stock is up about 12% on a year-to-date basis, underperforming most of the top Canadian tech stocks.
Nonetheless, Lightspeed is well positioned to deliver strong growth in the long term, led by its high recurring or reoccurring revenues. Lightspeed’s GTV (gross transaction value) has grown at a CAGR (compound annual growth rate) of 57% since fiscal 2019. During the same period, Lightspeed’s top line increased at a CAGR of 75%.
The company has changed its go-to-market strategy and is only focusing on two core products targeting retailers and restaurant owners. Further, it is primarily targeting high GTV customers, as they can adopt its multiple software modules, leading to lower churn and higher average revenue per user. Lightspeed is also expected to benefit from its focus on accretive acquisitions, which will drive its customer locations and strengthen its competitive positioning.
Lightspeed stock is incredibly cheap. Its next 12-month enterprise value/sales multiple of 1.6 is near the all-time low and reflects a significant discount.
Bottom line
While both Shopify and Lightspeed are solid long-term investments near the current levels, Shopify stock, with its large scale, growing products base, and ability to recover swiftly, appears more attractive.
