Insights

Better E-Commerce Stock: Shopify vs. Etsy

E-commerce is a broad industry. There are companies directly involved with the process, and facilitators like Shopify (NYSE: SHOP) and Etsy (NASDAQ: ETSY). I believe facilitators make better investments, as they usually have better margins and insulation against what is or isn’t in style.

However, Shopify and Etsy have been terrible investments in 2022 after crushing the market in the past two years.

SHOP data by YCharts

With that kind of sell-off, many investors may wonder if this is a solid entry opportunity, as both are still category leaders. So let’s dig into their most recent financial results and see which is the better buy in today’s tumultuous market.

A one-time effect influenced Etsy’s growth

First, a quick business overview: Shopify provides the software necessary to run an e-commerce store, including inventory management, shipping logistics, payment processing, and a website. In exchange for using its software, Shopify charges its customers a flat monthly fee and takes a slice of each transaction.

Etsy is similar, except it is focused on extremely small operations that usually sell custom or hand-made goods. Through Etsy’s marketplace, sellers can list their items, and Etsy takes a slice of each transaction in return.

Both businesses saw a massive boom during the pandemic. However, each is coming up against difficult comparisons now. For example, in the second quarter, Etsy’s revenue rose 11% versus a gross merchandise sales (GMS) decline of 0.4%. This disconnect is due to Etsy raising its transaction take rate from 5% to 6.5% at the beginning of the quarter — which caused some sellers to strike for a week.

Shopify’s revenue grew slightly faster at a 16% clip, with gross merchandise volume (GMV) rising 11%. For Shopify, its primary growth driver was its Merchant Solutions segment, which was up 18% year over year due to more customers adopting more services from Shopify.

Shopify is the clear winner regarding growth, as its growth came organically versus Etsy’s growth primarily coming through a one-time increase. Etsy can only push its sellers so far before an alternative arises.

Winner: Shopify

Shopify is spending like it’s going out of style

Moving to the bottom line, it’s clear: Shopify is spending heavily to promote and innovate its platform. Its expenses rose tremendously compared to modest 16% revenue growth:

Shopify Q2 Expense YOY Growth
Sales and Marketing
Research and Development
General and Administrative
62%
89%
67%

Source: Shopify. YOY = year over year

As a Shopify investor, I don’t like seeing this kind of growth-and-spending disconnect. Although it was profitable in 2021 because of COVID effects, it no longer holds that designation. To partially remedy this and reduce expenses, Shopify laid off about 10% of its workforce. CEO and co-founder Tobi Lütke blamed himself for the overhiring mistake, as he expected the COVID e-commerce gains to be permanent rather than revert to the standard adoption curve.

Etsy’s earnings aren’t nearly as messy. The company is profitable, although its net income fell 26% YOY. However, its adjusted EBITDA margin rose from 26% last year to 28% this year, so its cash flow metrics are improving — a positive sign for investors. Still, Etsy’s operating expenses rose at a 17% clip, which is still concerning to me, although not nearly as much as Shopify’s expense-growth rate.

Etsy maintained its profitability and is controlling its expenses relatively well, unlike Shopify. There’s no real argument in the competition for the more robust bottom line.

Winner: Etsy

The future

Perhaps the most critical segment of the overall comparison is what the future looks like for both businesses. After all, this is what will drive any future stock-price movements.

Etsy’s most significant growth catalyst is its booming advertisement business. Year to date, seller ad budgets have increased by 80% — growth that flies in the face of conventional wisdom about advertising during recessionary times. Since Etsy controls the ads, it makes money both from ad sales and increased revenue, so it is a critical initiative for the company.

Shopify has many irons in the fire, but one that steers it from its roots is its point-of-sale (POS) offering, which grew 47% YOY. POS systems are utilized in brick-and-mortar settings, not e-commerce. However, if Shopify can establish its brand in this space, it holds significant revenue potential.

Additionally, Shopify Plus (which targets larger companies) signed Asics and HP during the quarter. Shopify’s improving logistics capabilities and international expansion were likely a big reason why large brands like these two signed, and these improvements will deliver significant value to existing customers as well.

Shopify has a bigger future in front of it than Etsy, but this broad vision is also what is causing Shopify to increase its expenses rapidly.

Winner: Shopify

Which stock should you buy?

Although the tally is two points for Shopify and one for Etsy, there’s a lot more to the picture for both companies. Etsy’s stock trades for 6.5 times sales, lower than Shopify’s 9.1 times, despite having much better margins. This valuation discrepancy is due to investor sentiment, as many people believe Shopify has a huge growth runway.

Shopify’s runway is likely larger, but if it fails, the downside will be much lower than Etsy’s. If you’re invested in these companies for the next three to five years, it’s hard to ignore Shopify’s potential, but its business has shown some weakness lately.

The choice between which stock is better ultimately boils down to your risk tolerance. Etsy is the lower-risk play, but it comes with limited upside. Shopify is the exact opposite. Nevertheless, both are solid businesses, and investors should choose accordingly.

Keithen Drury has positions in Etsy and Shopify. The Motley Fool has positions in and recommends Etsy, HP, and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Rebate Rewards

Level 2 Rebate

Deposit $2,000 and get $200 Rebate
$ 200 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $2,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $200 Rebate
Popular

Level 1 Rebate

Deposit $1,000 and get $100 Rebate
$ 100 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $1,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $100 Rebate

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex Securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

EASY QUALIFICATION & LOW ENTRY
NEW CLIENT REBATE OFFER
EARN UP TO $200 CASH REBATE
Act Fast - Promotion Ends In
Click Here To Get Started
EASY QUALIFICATION & LOW ENTRY
NEW CLIENT REBATE OFFER
EARN UP TO $200 CASH REBATE
Act Fast - Promotion Ends In
Click Here For More Info