E-commerce has been cemented as a necessity by the pandemic this year. As a result, many stocks in this realm have been off to the races. Even Amazon (NASDAQ:AMZN) and its 10-figure valuation has been a huge winner with shares up over 60% year to date as of this writing.  

But not all digital commerce stocks are sure-fire buys. Investors should tread lightly with software developer and online store manager BigCommerce (NASDAQ:BIGC) after its first report as a publicly-traded company. Online pet retailer Chewy (NYSE:CHWY), on the other hand, looks like a relative value.

A man and his dog doing a home improvement project.

Image source: Getty Images.

The digitally literate pet

Chewy has been on fire since its IPO in the summer of 2019. Shares are up 155% since its public debut, erasing some early struggles in the months immediately following the stock's initial trading. 

The reason has been fast and steady revenue growth. And Chewy's fiscal 2020 second quarter (the three months ended Aug. 2) didn't disappoint. Sales grew 47% from a year ago to $1.70 billion -- driven by a 38% year-over-year increase in active customers to 16.6 million and a 3.2% increase in average sales per active customer. As of this writing, Chewy trades for a mere 3.6 times trailing 12-month sales, a bargain for such a high-growth name.  

The reason for the value is two-fold: Retail (including online) is a low-margin business, and Chewy still operates at a loss. As to the first point, Chewy's gross margin on product sold was 25.5% in the fiscal second quarter. The good news, though, is it was an improvement from 23.6% in the year-ago period as Chewy wins over new customers and thus benefits from greater scale. And on point two, Chewy chewed through $77.9 million in cash through the first half of the year (as measured by free cash flow, revenue less cash operating and capital expenditures) compared to negative $53.5 million in free cash flow during the same period in 2019.  

The resulting cash and equivalents left on the balance sheet as of the beginning of August was $153.8 million. In need of some extra liquidity, the company just announced it will be selling additional stock at $55.25 a share, which would raise as much as $324 million. As for the rate of cash burn this year, much of it is related to the construction of a new distribution center, but actual operating profits are quickly homing in on breakeven. I don't think this will ever be a wildly profitable business (Amazon's e-commerce segment, when backing out AWS cloud computing, is a low single-digit operating profit enterprise), but Chewy's shares have that inevitability priced in.

In the meantime, the marketplace for four-legged friends is picking up all sorts of new customers with its easy auto-ship function to help with the monthly needs of the family pet. Maintaining its pace of torrid growth amid the pandemic, Chewy stock is worth a look right now. 

Riding a wave of Shopify hype

Before launching into a review of its quarterly numbers, I'd like to say I think BigCommerce is a wonderful company. Together with other software and online marketplaces like Etsy, Wix.com, and Shopify (NYSE:SHOP), BigCommerce is helping to democratize retail with technology and bringing much-needed entrepreneurship back to the industry.  

At the time of BigCommerce's IPO in early Aug. 2020, my issue was (and remains) related to valuation. Many investors were comparing the small company to Shopify -- which, not incidentally, has gained over 3,000% in value over the last five years. In its first day of trading, BigCommerce stock tripled in price to $72 per share. It would go on to double again three weeks later, clearing $140 per share, although it has since been humbled and is trading below $80 as of this writing.  

But BigCommerce is no Shopify, at least not yet. Revenue during the second quarter increased 33% year over year to $36.3 million. By comparison, Shopify and its services -- ranging from online store management to logistics and shipping services -- grew 97% in the same period. And while there is great potential for BigCommerce as its software-centric offerings enjoyed a gross profit margin of 78% during the first half of the year (Shopify's gross margin was 53%), it operated on negative free cash flow of $18 million through the first six months of 2020.

As great as BigCommerce's results were, shares trade for more than 40 times trailing 12-month sales. The company did raise about $176 million in cash when it went public, which it plans to use to continue building out its software-as-a-service platform for online retailers. But given the comparatively "modest" outlook going forward (third-quarter revenue was forecast to be roughly the same as in the previous quarter), this premium-priced stock is too rich for my taste at the moment.  

Don't get me wrong, I'm rooting for BigCommerce, just as I'm rooting for other e-commerce stocks that are helping to level the playing field for small businesses in the retail space. But from an investment standpoint, there are better buys right now for investors looking to bet on an increasingly digital future. So I say pass on BigCommerce (but keep it on your watch list) and give Chewy a serious look.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.