Better Buy: Shopify vs. Zoom Video Communications

The coronavirus pandemic caused many changes, but increases in online shopping and remote work have been two of the most prominent trends. Not surprisingly, Shopify (SHOP 0.09%) and Zoom Video Communications (ZM -0.25%) benefited greatly from these secular shifts and made many investors much wealthier in the process. In fact, share prices of Shopify soared 160%, and Zoom stock surged 288% over the last year.

But which of these tech stocks is the better buy today? Let's dive in.

Shopify: Simplifying digital commerce

Shopify's digital commerce platform supports over 1.7 million global merchants, helping them create and manage online shops across different channels. For example, merchants can sell through the web storefronts, mobile apps, social media, and marketplaces. In each case, Shopify has solutions for everything from inventory management to payment processing.

Image source: Getty Images

One of the great things about Shopify is that it helps merchants build a brand name and develop customer relationships. This differentiates the company from digital marketplaces like Amazon and eBay, where all sellers operate on the same platform. For instance, do you remember your last Amazon purchase? Who was the seller? I purchased something from Amazon last week, and I can't recall who sold the product. That's fine in some cases, but it's not a good strategy for building a brand name.

To further empower its merchants, Shopify launched the Shop App in April 2020, which provides consumers with personalized recommendations based on past purchases and the brands they follow. This helps drive repeat purchases and deepens customer engagement. The Shop App also incorporates parcel tracking and Shop Pay, the company's accelerated checkout experience, which improves conversion rates by up to 18%.

Shopify's merchant-centered solutions have helped the company grow revenue and grab market share exceptionally quickly, especially in the wake of the pandemic.

Source: Shopify SEC Filings. CAGR: compound annual growth rate.

In the years ahead, as digital commerce becomes a larger part of total retail, Shopify should continue to benefit. And given that management sees a $153 billion market opportunity in small- and medium-sized businesses alone (i.e., not including larger brands or micro-merchants), the company still has a long runway for growth.

Zoom Video Communications: Modernizing meetings

Zoom's unified communications platform offers video, voice, chat, and content-sharing solutions across devices. This makes it easy for friends, families, and teams to stay connected. Not surprisingly, as businesses shifted to work-from-home models during the pandemic, Zoom's platform benefited from strong demand.

While rival products like Microsoft Teams and Cisco Webex benefited from the same tailwinds, Zoom expanded much more rapidly, taking market share in the process. In fact, Zoom has surpassed both Cisco and Microsoft to become the market leader in video-conferencing software. So what made the difference?

One of the driving forces behind this incredible growth is Zoom's focus on customer satisfaction. Ensuring a good user experience is core to the company's growth strategy, and that has helped Zoom achieve a higher net promoter score (a measure of how likely customers are to recommend the product) than any of its rivals: Zoom scores 66, while Cisco Webex and Microsoft Teams score 46 and 55, respectively.

Put simply, Zoom is one of the simplest, most functional meetings solutions on the market, and that has translated into strong customer and revenue growth.

Source: Zoom SEC Filings. CAGR: compound annual growth rate.

Currently, Zoom offers a number of other products that could further boost adoption. For instance, Zoom Rooms combines the company's meetings software with third-party hardware installations (soundbars, cameras, computers, touch screens) enabling clients to turn corporate offices into modern video-conferencing suites. This makes it easy to schedule and manage virtual meetings, and it should help Zoom continue to take market share even when (or if) employees return to corporate offices.

As a final thought, in Zoom's SEC Form S-1 filing, management indicated a market opportunity of $43 billion by 2022. However, potential use cases have expanded in the wake of the pandemic (i.e., remote work, remote education, telemedicine), and the company's market opportunity is likely much larger now. In other words, despite tremendous growth last year, Zoom still has plenty of room to run.

The verdict

Shopify trades at 485 times earnings, and Zoom trades at 254 times earnings. In both cases, the valuation is astronomical. Investors that are uncomfortable with high volatility should avoid both of these stocks.

That being said, quickly growing businesses like Shopify and Zoom typically reinvest a substantial portion of revenue back into the business, making them hard to value with price-to-earnings (P/E) ratios.

So which is the better investment? While both of these tech stocks could be long-term winners, my money is on Shopify. The e-commerce market is big and getting bigger, and the company's merchant-first approach should continue to resonate with clients for many years to come.