Is BigCommerce Stock a Better Buy Than Shopify?

Since its IPO in early July, BigCommerce (BIGC 12.56%) has often drawn comparisons to investor darling Shopify (SHOP -0.45%). It's true that, at its core, BigCommerce's software for companies managing online-centric sales is similar to where Shopify also got its start (although BigCommerce has a heavier slant toward business-to-business services, compared to Shopify's business-to-consumer base). But as it has expanded into an e-commerce ecosystem covering warehousing and shipping logistics, credit, and other adjacent services, Shopify is really in a league of its own in helping small businesses and entrepreneurs transition to a more digital age.

When picking a stock, "better" can be a subjective description. And drawing strict parallels between these two companies to determine which is better is to make an unfair comparison. 

Image source: Getty Images.

Fixing the apples-to-oranges comparison

On the surface, it's easy to say Shopify is the better stock. The company was founded in 2004 as an online store by current CEO (and snowboarding enthusiast) Tobi Lutke, and since its IPO in the spring of 2015, shares are up an astonishing 3,500% as of this writing. BigCommerce was founded five years later in 2009 as a cloud-based software-as-a-service (SaaS) platform for online business management. It's following a similar timeline as Shopify in its founding and path to becoming a public concern, but it's simply too soon to say if BigCommerce's growth (and subsequent stock performance) will match the meteoric rise of Shopify.

It's certainly off to a good start. When removing Shopify's "merchant services" segment -- the non-software subscription revenue generated from merchandise sold on its platform, which grew 106% year-over-year and accounted for over two-thirds of the company's overall revenue -- BigCommerce and its sole focus on software did pretty well by comparison during the second quarter of 2020. 

Pp = percentage point. Data source: BigCommerce and Shopify.

But what about valuation?

One could argue that, at 40 times trailing 12-month revenue to Shopify's 52 times trailing 12-month metric, BigCommerce is the better buy -- although you could also very easily counter that neither is a good purchase at the moment with such sky-high valuations. But does Shopify really warrant a higher premium? The short answer is yes, at this point in time it does. 

In a nutshell, the reason is that the merchant solutions segment at Shopify creates a turnkey solution for businesses (if they choose to make use of it) in need of making some updates for the times. And as more businesses sign onto the SaaS platform, there's a high likelihood Shopify also creates some incremental revenue -- albeit at a lower profit margin -- from merchant services via digital payment solutions, marketing, logistics, etc. The more-than-100% rate of growth for this area of Shopify's business is getting a huge bump from the big migration to online shopping this year due to the pandemic, and that rate isn't sustainable over the long-term. But it nevertheless gives the company a network effect edge over BigCommerce's SaaS pure-play. 

This is, of course, simply my take on the two stocks at this particular juncture in time. I'm rooting for BigCommerce just as I am Shopify, as the two e-commerce companies' success relies on the success of their customers -- many of them small businesses. And long-term, I think both will make serious headway in their missions. At the end of June, BigCommerce had $25.4 million in cash and equivalents and $71.3 million in debt, excluding the nearly $176 million it raised from its IPO. Shopify, by contrast, had $4 billion in cash and equivalents and no debt. Both are well-funded to pursue further expansion.

But rather than call Shopify the superior stock, it would be more accurate to call it a very different one from newcomer BigCommerce. Both of them are worth watching as e-commerce continues its ascent and helps small businesses and entrepreneurs succeed in the digital age.