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In this piece, I
used TipRanks' comparison tool to evaluate two e-commerce stocks, Amazon (
NASDAQ:AMZN
) and Shopify (
NYSE:SHOP
), in order to determine which is better. Shopify has significantly outperformed Amazon, returning 36.4% year-to-date versus Amazon's 21.5% return. Additionally, over the last 12 months, Shopify held up much better than Amazon, with a gain of 1% versus Amazon's 30% decline.
Both are behemoths in North American e-commerce, but Amazon is far larger than its Canadian counterpart. While e-commerce names might seem like surefire buy-and-hold stocks, a review of these companies' fundamentals and valuations reveals a distinct winner.
Amazon (NASDAQ:AMZN)
After eight years of
profitability, Amazon lost money in 2022, weighed down by investments like its 20% stake in the EV maker Rivian (
NASDAQ:RIVN
), whose value plunged in 2022. Between the punishment doled out by investors over the last year or so and its soaring valuation during the pandemic, there's a lot of noise affecting Amazon shares. After considering those impacts, a bullish view still looks appropriate for the long term.
To deal with its $2.7 billion loss in 2022, Amazon began a raft of cost-cutting measures, including halting its experimental projects, cutting 18,000 jobs, and pausing grocery store growth. Those moves should benefit the company over the long run because 2022 served as a sort of wake-up call: even tech behemoths aren't invincible.
However, when we look more closely at Amazon's valuation relative to its history, it becomes clear that it may take some time for the bull thesis to play out. On the one hand, growth and momentum investors have been in love with the e-commerce giant for years, especially during the pandemic, when online shopping received a major push forward.
On the other hand, value investors would argue that Amazon has spent much of its publicly-traded life overvalued. The good news is that the company looks undervalued on some measures. For instance, it's currently trading at a price-to-sales (P/S) ratio of about 2.0 versus its mean P/S of about 3.6 over the last five years.
Also, Amazon's stock and valuation have come down a lot since the pandemic, when it traded at a P/S ratio of 5.0 and above. Additionally, it's trading slightly above its pre-pandemic stock price but below its pre-pandemic P/S of about 4.0 to 4.5, also suggesting a long-term bullish view.
What is the Price Target for AMZN Stock?
Amazon has a Strong Buy consensus rating based on 35 Buys, one Hold, and zero Sell ratings assigned over the last three months. At $135.88, the average
Amazon stock price target implies upside potential of about 30%.
Shopify (NYSE:SHOP)
A review of Shopify's stock price action reveals similarities with Amazon's. However, there is a critical difference between them. Although Shopify did manage to turn a profit in 2020 and 2021, probably due to the pandemic, it became far more
unprofitable in 2022 than it was before the pandemic. Overall, SHOP's fundamentals and valuation suggest a bearish view might be appropriate.
Like Amazon, Shopify was pummeled by its investments in 2022. For example, it took a massive $1 billion non-cash loss in the second quarter alone as a write-down of its equity investments, accounting for nearly all of that quarter's loss. Unfortunately, the investment-related losses may be masking a larger issue.
Shopify's research and development and selling, general, and administrative expenses soared to $1.5 billion (about 43% higher year-over-year) and $1.73 billion (30% growth), respectively, in 2022. However, its gross profit only rose 11% from 2021, while its revenues grew only 21.4%.
Finally, although its valuation has plummeted, Shopify still looks grossly overvalued at a P/S ratio of 12.3, relative to the stronger, larger Amazon. Shopify's mean P/S over the last five years is 31.1, but that just shows that it's been overvalued for years.
What is the Price Target for SHOP Stock?
Shopify has a Moderate Buy consensus rating based on 11 Buys, 18 Holds, and one Sell rating assigned over the last three months. At $49.44, the average
Shopify stock price target implies upside potential of 1.6%.
Conclusion: Long-Term Bullish on AMZN, Bearish on SHOP
Investor sentiment has long played a significant role in Amazon's and Shopify's valuations. However, it looks like investors have valued Shopify as if it's the next Amazon rather than based on its own fundamentals. Thus, Amazon looks like the clear winner.
Unfortunately, Amazon may have a challenging time in the stock market in the near term due to the possibility of a recession, but the company has staying power and should eventually come roaring back. The key caveat is that a better entry price might materialize, but even at current levels, Amazon looks undervalued when factoring in its long-term potential and historical valuation.
Disclosure
The stock market has been very quiet so far this April, but that might be changing as soon as next week. There are several major events happening next week, including large-cap technology earnings reports such as Microsoft MSFT, as well as some key economic data releases.
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Amazon plans to expand its business selling office supplies in Europe and internationally after the pandemic helped boost sales as companies shopped more online and looked for bulk discounts.