Shopify (SHOP -1.77%) and Baozun (BZUN -5.26%) both make it easier for businesses to set up online stores. Shopify, which is based in Canada, helps more than 1.7 million businesses set up online stores worldwide. It also enables merchants to process payments, fulfill orders, and organize their social media and marketing campaigns with its self-service tools.
Baozun, which is based in China, helps big multinational brands like Nike and Starbucks enter the Chinese market. It isn't a self-service platform like Shopify. Instead, Baozun sets up online stores, logistics services, and marketing campaigns with its own staff, so foreign companies that outsource those tasks to Baozun don't need to worry about hiring their own sales, tech, and support teams in China.
I compared these two e-commerce companies a year ago and declared that Baozun's lower valuation would enable it to outperform Shopify in 2021. That was clearly a bad call: Baozun's stock has declined about 60% over the past 12 months, but Shopify's stock has rallied more than 30%.
Let's see why I was dead wrong about Baozun -- and if it still has a shot of rebounding and catching up to Shopify next year.
What I got wrong about Shopify
A year ago, I believed Shopify's growth would decelerate significantly as it faced tougher year-over-year comparisons in a post-pandemic market. Well, that slowdown happened, but it just wasn't that severe. After rising 86% in 2020, Shopify's revenue grew another 66% year-over-year in the first nine months of 2021 -- and analysts expect it to be up 56% for the full year.
Shopify attributed the continued momentum to its expansion across the omnichannel market, which includes integrated shopping experiences on social networks, music purchases on Spotify, and other non-traditional shopping methods. It also expanded beyond its core market of smaller merchants by establishing new Shopify Plus partnerships with bigger brands like Logitech.
Profits have continued to improve too. While adjusted gross margin declined throughout the pandemic in 2020, it has expanded year-over-year in the first nine months of 2021. On an adjusted basis, net income soared more than 14 times in 2020, then more than doubled year-over-year in the first nine months of 2021. Analysts expect its adjusted earnings per share to roughly double for the full year.
The other issue I had with Spotify was its valuation. That hasn't changed: It's still richly valued at nearly 280 times forward earnings and 23 times next year's sales, which leaves it highly exposed to inflation-related sell-offs.
What I got wrong about Baozun
Last December, I expected Baozun's growth to remain stable as the pandemic passed and international businesses focused on Chinese shoppers again. But Baozun's growth wasn't that impressive this year. Its revenue rose 22% in 2020, but just 13% year-over-year in the first nine months of 2021. Analysts expect its revenue to rise just 6% for the full year.
Baozun attributed its slowdown to macro headwinds for the Chinese economy, a decline in the country's consumer sentiment, and the government's ongoing crackdown on top e-commerce players like Alibaba. Unresolved trade tensions between the U.S. and China, along with the ongoing supply chain challenges, are likely exacerbating that pain.
Baozun's operating margins expanded year-over-year in 2020, but declined significantly in the first nine months of 2021 as it grappled with its decelerating sales growth and rising operating costs.
On the bright side, its gross margins held steady above 60% as it pivoted more businesses toward its higher-margin "non-distribution" model, which enables companies to directly ship their products to Chinese customers without passing through Baozun's capital-intensive logistics network.
Baozun's adjusted earnings grew 50% in 2020, but analysts anticipate a 75% decline this year as its operating margins continue to crumble. Therefore, Baozun's stock still can't be considered a bargain at 16 times forward earnings and less than one times this year's sales.
Shopify is the better buy right now
Shopify's stock looks expensive, but it has a much brighter future than Baozun. It will continue to flourish as more businesses declare their independence from massive third-party marketplaces like Amazon, and it still has plenty of growth opportunities across omnichannel platforms and overseas markets.
Baozun remains a top gatekeeper to China's online shoppers, but it faces too many macro headwinds right now. China's ongoing crackdown on its top tech stocks, along with the U.S. threats to delist shares of Chinese companies that don't comply with tighter auditing standards, make it even less appealing.
This time around, I believe Shopify is a better e-commerce stock than Baozun. I'll check back again next year to see if I made the right call.