Top Picks in the Market Today: Amazon versus Shopify
E-commerce is a booming sector with significant expansion potential. As per Statista Market Insights, the global e-commerce market is projected to escalate from a $3.6 trillion value in 2023 to an impressive $6.5 trillion by 2029.
Two major players, Amazon (AMZN,-0.66%) and Shopify (SHOP,-0.59%), are aggressively competing to seize a piece of this growth. While Amazon primarily sells directly to consumers, Shopify supports other businesses in selling their products online by offering them the necessary technological infrastructure.
Both companies posted impressive third-quarter results, leading to a surge in their stock prices in November. So, which stock offers a better investment opportunity at the moment?
Reasons to invest in Amazon
Amazon garnered a dominant 38% share of the US e-commerce market in 2023, leaving its closest competitor trailing with a mere 6% share. However, internationally, Amazon has faced challenges. In Q3 2023, its international division reported an operating loss of $95 million, which it successfully turned around in 2024, recording an operating income of $1.3 billion in Q3. This moved Amazon's overall operating income by 56% year-over-year to $17.4 billion.
Amazon is also focusing on enhancing its free cash flow, which enables it to invest in its business, pay off debts, and purchase shares. In the last four reported quarters, Amazon's free cash flow has increased by 123% year-over-year to $47.7 billion. This impressive growth is noteworthy considering that Amazon's trailing-12-month free cash flow was negative $19.7 billion just two years ago.
Amazon's consolidated Q3 revenue rose by 11% to $158.9 billion, which contributed to strong financial results in both free cash flow and operating income. Innovative features such as an AI-powered shopping assistant and AI shopping guides boosted its retail sales. Amazon's AI tools for third-party sellers also aided in its revenue growth during Q3, as these sellers contributed $37.9 billion to Amazon's total sales of $158.9 billion.
A look at Shopify
Shopify does not operate as a retailer like Amazon, but rather, it supplies e-commerce technology to other businesses. Shopify generates income from subscription fees for its software platform, as well as charges for various services like online payment processing and currency conversion.
Revenue from non-subscription services, like online payment processing and currency conversion charges, is categorized under Shopify's merchant solutions segment. Merchant solutions accounted for 72% of Shopify's $2.2 billion in third-quarter revenue. This non-subscription income plays a crucial role in the company's performance, as the volume of sales processed through Shopify's software (Gross Merchandise Volume) is an essential metric for the company.
In Q3, Shopify's Gross Merchandise Volume increased by 24% year-over-year to $69.7 billion, fueling a 26% year-over-year revenue growth. Shopify's ability to retain sellers and attract new ones is one of its strengths. Existing merchants have consistently increased their sales using Shopify's platform, offsetting any loss due to merchants leaving the platform. As an example, merchants joining Shopify in 2020 saw their sales more than double by 2023.
Sellers remain loyal to Shopify due to its user-friendly platform. This year, Shopify introduced AI tools to help merchants manage customer inquiries, and plans to roll out a feature allowing for automatic tax filing through the Shopify platform.
Choosing between Amazon and Shopify
Both companies have compelling investment arguments. Shopify's Q3 revenue growth of 26% year-over-year outpaced Amazon's 11% growth. However, Amazon is a vast, diversified company with roots in retail, cloud computing, consumer technology, and even satellite-powered broadband services.
Their respective price-to-earnings ratios (P/E ratios) may offer some insights into which stock is the better purchase. This metric gauges a stock's value by representing the amount investors are willing to pay for every $1 the company generates.
Shopify's impressive third-quarter results led to a surge in its stock price, resulting in a P/E multiple of over 100. Amazon's P/E multiple is significantly lower, suggesting it is a better investment value. With Amazon's improving financials, particularly in terms of operating income and free cash flow, along with its vast business and lower P/E multiple, Amazon seems to be the better investment option compared to Shopify at this moment.
Given the strong performance of both Amazon and Shopify, investors who are interested in the finance and investing aspects of e-commerce might consider the following:
Investing in Amazon could be an attractive option due to its dominance in the US e-commerce market and its successful turnaround in international operations, leading to significant growth in free cash flow.
Conversely, investing in Shopify could appeal to those interested in e-commerce technology, as the company generates revenue from software subscriptions and merchant solutions, driving its Gross Merchandise Volume and revenue growth.
