Shopify (SHOP 0.66%) and Baozun (BZUN 0.33%) both help businesses establish their online presences with online storefronts and other tools. Shopify, which became Canada's most valuable company earlier this year, was founded in Ottawa in 2006. Baozun was founded in Shanghai in 2007.
Baozun is often referred to as the "Shopify of China," but it's attracted fewer bulls than its Canadian counterpart. Baozun went public at $10 a share in 2015, and its stock currently trades in the mid-$30s. Shopify went public at $17 a share that same year, but it blew past $1,000 a share earlier this year.
Shopify clearly generated bigger gains than Baozun, but past performance doesn't guarantee future gains. Shopify's stock is also looking a bit frothy at nearly 280 times forward earnings, while Baozun trades at a mere 25 times forward earnings. So is it time to sell the market darling and buy the oft-overlooked underdog?
The differences between Shopify and Baozun
Shopify and Baozun might initially seem similar, but the companies are actually very different.
Shopify mainly helps small-to-medium-sized businesses launch their own online stores to break free from big online marketplaces like Amazon and eBay. It also offers other services for fulfilling orders, processing payments, tracking inventories, launching marketing campaigns, and more.
But Shopify isn't an "end-to-end" e-commerce solution that helps merchants run their websites, store their inventories, or ship their orders. Instead, it merely provides the cloud-based tools for merchants to run their own online businesses.
Baozun provides an end-to-end platform that runs all the e-commerce operations, logistics, IT, and marketing campaigns for large companies. It mainly serves large overseas companies, like Nike and PepsiCo, that want to establish an e-commerce presence in China without hiring their own local teams.
That key difference makes Baozun's business more capital-intensive than Shopify's. But in recent years, Baozun replaced its low-margin "distribution-based" model, which takes on a company's inventories and ships the orders to customers, with a higher-margin "non-distribution" model, which lets companies directly ship their products to customers.
Which company is growing faster?
Shopify's revenue rose 47% to $1.58 billion in 2019. Its gross merchant volume (GMV) surged 49% to $61.1 billion. However, its adjusted net income fell 22% to $34.3 million as it ramped up its investments in new services and bought 6 River Systems to support its new Shopify Fulfillment Network.
In the first nine months of 2020, Shopify's revenue surged 82% year over year to $1.95 billion as the pandemic forced more businesses to sell their products online. Its GMV increased 46% year over year in the first quarter, 119% in the second quarter, and another 109% in the third quarter.
That surging revenue trickled down to an adjusted net profit of $292 million, compared to a loss of $16 million a year ago, even as it ramped up its investments and expanded its fulfillment network.
Baozun's revenue rose 35% to 7.28 billion yuan ($1.05 billion) last year. Its total GMV rose 51% to 44.41 billion yuan ($6.79 billion), with its non-distribution GMV accounting for 91% of that total. But its adjusted net income rose just 3% to 357.1 million ($51 million) as a warehouse fire crushed its earnings in the fourth quarter.
In the first nine months of 2020, Baozun's revenue rose 22% year over year to 5.5 billion yuan ($840 million). Its GMV grew 18% in the first quarter, 31% in the second quarter, and 19% in the third quarter. Its adjusted net income rose 36% to 264.9 million yuan ($40.5 million).
Those growth rates were decent, but Baozun didn't experience a pandemic-induced acceleration like Shopify for two reasons. First, Baozun mainly serves large overseas companies, which exercised caution as the pandemic spread across China. Second, escalating trade tensions likely caused some American companies to reevaluate their dependence on Chinese consumers.
Baozun's customers clearly remained invested in the Chinese e-commerce market, since big shopping holidays like 618 (June 18) and Singles Day (Nov. 11) were too important to miss, but they didn't aggressively ramp up their spending like Shopify's independent merchants.
The outlook and verdict
Analysts expect Shopify's revenue to grow 81% this year, and for its adjusted earnings to rise 12-fold. But next year, they expect its revenue to rise 33% and for its earnings to dip 2% as the pandemic passes and leaves it facing tough year-over-year comparisons.
Analysts expect Baozun's revenue and earnings to grow 32% and 48%, respectively, this year, as the Chinese economy warms up again and overseas companies increase their e-commerce spending. Next year, they expect its revenue and earnings to grow 29% and 33%, respectively.
We should always be skeptical of analysts' estimates, but Baozun clearly looks like an undervalued growth stock right now. Shopify still has room to run, but it's becoming difficult to justify its frothy valuations. Therefore, I believe the "Shopify of China" could outperform its Canadian counterpart in 2021.