E-commerce giant eBay (EBAY 0.31%) has been a solid investment for the past decade, consistently beating the broader markets. eBay shares have returned 261% since April 2010, compared to the S&P 500 returns of 133% in the same period (see chart below).
Even amid the current uncertainty surrounding equity markets brought on by the coronavirus pandemic, eBay has managed to hold its own. The stock dipped along with the rest of the market in March but is currently trading flat year-to-date compared to the double-digit declines for the S&P 500.
While eBay should continue to benefit from the growth in online sales, there is another high-growth e-commerce stock that seems well poised to not only beat the broader markets but crush them in the upcoming decade. Few companies are better positioned than Shopify (SHOP -2.37%) to capitalize on the e-commerce opportunity in North America and international markets. And it's this potential that makes it the better growth stock between the two at the moment.
eBay's sales growth is decelerating
eBay's yearly revenue has risen nearly 64% from $6.6 billion in 2011 to $10.8 billion in 2019. The eBay platform facilitates transactions between buyers and sellers. While Amazon (AMZN -1.65%) sells products from others and well as its own products on its platform, eBay does not take ownership of the product. Instead, it charges fees to the sellers to facilitate the transaction, and this seller fee accounts for the majority of its sales.
In 2020, the COVID-19 pandemic is expected to weigh heavily on the company's top line, and analysts now expect yearly sales to fall by 11.2% to $9.5 billion. In the fourth quarter of 2019, eBay's revenue was down 2% at $2.8 billion, despite a 2% rise in active buyers. Further, the company also provided a less-than-impressive forecast for the first quarter, dragging its stock lower. eBay's sales volume declined in the U.S. and international markets, despite being one of the top e-commerce players in the world.
This e-commerce giant has been experiencing sluggish growth in sales for a while now. While the company management did not attribute the recent sales decline to any particular factor, is it possible that eBay is fast losing relevance in today's changing digital landscape. For example, social media giant Facebook has its own online marketplace that allows users to buy and sell products. Facebook is a potential threat with an already engaged base of active users. eBay's lower sales volumes are a matter of concern at a time when most e-commerce platforms continue to experience stellar growth.
Activist hedge fund Starboard Value acquired a 1% stake in eBay last year and took the company's management to task over its falling sales. Starboard has also been pushing eBay to sell its classified advertising business for a while, resulting in the ouster of CEO Devin Wenig as well in September 2019.
Shopify stock has generated massive returns since IPO
While eBay is struggling with management issues, a Canadian e-commerce company has come along in the past few years and dwarfed the broader market returns. Shopify went public back in May 2015 at $17 per share. If you would have bought 59 Shopify shares for $1,003 at its IPO price, the investment would have been worth a staggering $38,000 right now.
Image source: Getty Images.
Shopify's monstrous returns can be attributed to the high growth of the e-commerce space. Similar to eBay, the company provides an e-commerce platform and various services to help businesses of all sizes to promote, sell, and ship their products.
Shopify has two primary business segments. The subscription solutions segment generate recurring sales from ad-on services and leveraging the Shopify platform. Shopify's subscription business offers a range of tools and services, including digital storefronts, web design, payment processing, shipping, and marketing to e-commerce sellers.
It has a three-tier subscription plan offering that caters to businesses of all sizes. While most businesses on the Shopify platform subscribe to lower monthly plans, enterprise customers that generate a significant portion of Shopify's gross merchandise volume subscribe to the more expensive advanced plans. The Shopify Plus plan (that costs $299 a month) is primarily for billion-dollar businesses with high-volume sales.
Shopify's merchant-solutions segment generates revenue from payment processing fees (via Shopify Payments), transaction fee from online orders, delivery, and shipping. Though Shopify's core business is its subscription segment, the company is now generating a significant portion of sales from merchant solutions.
At the end of 2019, Shopify had over 1 million businesses on its platform, and its subscription sales accounted for 41% of total sales in 2019, compared to 43% in 2018, 46% in 2017, and 48% in 2016. The subscription business is the significantly more profitable segment of the business. In 2019, the subscription segment accounted for 59.4% of gross profits as it had a gross margin of close to 80%.
Last year, Shopify announced that it is pumping in $1 billion over the next five years to set up a network of fulfillment centers and enhance the merchant experience. Shopify depends on growing its merchant base to drive both merchant solutions and subscription revenue growth in the upcoming decade.
The current environment should drive growth in online shopping
The COVID-19 pandemic is forcing consumers to stay indoors, which has fast-tracked the transition toward online shopping. It is possible that Shopify may benefit from the temporary business closures and will be able to get more merchants on its platform as they will be forced to shift to an online business model.
The growth in e-commerce has been strong in the last few years, but the ongoing lockdowns may accelerate this trend. According to an eMarketer report, online sales will account for 16% of sales in the U.S. by 2023, up from 11% in 2019.
In terms of revenue, Shopify is much smaller than e-commerce giants like Amazon and eBay. However, it's growing at a stellar pace, making it an exciting bet for long-term investors.
Valuation might be a concern
Shopify continues to be in growth mode. It increased sales from $205 million in 2015 to $1.58 billion in 2019. Analysts now expect sales to grow by 25% in 2020 to $1.98 billion. But once the threat of the coronavirus pandemic is under control, Shopify sales are projected to roar back to life with estimated revenue growth of 38.3% in 2021, according to analysts' consensus data from Yahoo! Finance.
Shopify's stellar rise in stock price has driven its valuation sky-high. It has a market cap of $75.4 billion, indicating a forward price-to-sales ratio of 37.5. But the company's earnings reports have continued to beat analyst estimates over the years, and its expensive valuation metrics are supported by robust growth.
Comparatively, eBay is trading at a forward price-to-sales multiple of 3.3. Analysts expect sales to be 4.8 times higher than Shopify's in 2020. However, eBay has a market cap of $31.3 billion which is more than 50% below that of Shopify's. We can see that investors are betting big on Shopify for a simple reason -- incessant growth.
The verdict
Shopify withdrew its guidance for the rest of 2020 due to the ongoing uncertain macro conditions. While several businesses are currently shutdown, the e-commerce giant will bank on its subscription revenue to offset a part of the near-term projected revenue decline.
Shopify has an expanding addressable market and the long-standing prospects for Shopify remain bright as its growth opportunity appears massive. That makes it a better proposition than eBay right now and a winning bet for investors of long-term growth stocks.
