Few companies seem as equally matched as Shopify (SHOP 2.34%) and Block (SQ +0.76%). Both have been instrumental in allowing entrepreneurs to launch their businesses, and both platforms are currently expanding beyond just helping individuals and small businesses get their starts.
Yet does one have a competitive edge over the other? Do the new markets they're targeting present better growth opportunities, or do they increase the risks investors face? Shopify and Block were high-flying growth stocks, so let's see if one of them is the better buy today.
Image source: Getty Images.
The case for Shopify
Tech stocks like Shopify boomed after the start of the pandemic as lockdowns allowed millions of people the freedom to launch new businesses. According to the U.S. Census Bureau, more than 4.4 million new businesses were created in 2020, the greatest number of business launches ever and 51% more than the average number of launches between 2010 and 2019.
Many of those start-ups turned to Shopify for help. The cloud-based e-commerce platform provides businesses with the tools needed to start, grow, market, and manage retail operations. First, it was by simply providing them with an online presence, but over the years Shopify has added point of sale capabilities, payments options, multichannel opportunities for sales on third-party websites, small business loans, and order fulfillment.
Business is booming, with revenue growing 46% in the third quarter to $1.2 billion as gross merchandise value transacted soared 35% to $42 billion. Importantly, monthly recurring revenue (MRR) was up 33% year-over-year.
Shopify has grown to command the second-largest share of e-commerce retail sales behind Amazon.com, but it's no longer just about the little guy. Medium-sized and enterprise-class businesses are turning to Shopify, and its Shopify Plus program lets high-volume merchants sell across any platform by customizing automated workflows across all stores. Plus customers now account for 28% of MRR, up from 25% last year, and include businesses like Heinz, Staples, and Logitech.
Wall Street expects revenue to grow five-fold by 2025, hitting over $16 billion annually, while operating profits are expected to explode, rising to $3.5 billion from the $90 million reported in 2020. That's likely why analysts have set a one-year consensus price target almost double its current $850 price tag. This would be an even more dramatic increase after the 14% plunge the stock took on reports it was terminating fulfillment contracts with four third-party warehouses as it brings those services in-house.
While some analysts see a challenge to future growth (several cut their price targets last week), most remain bullish, and the stock is now at a price it hasn't been at since 2020.
Image source: Block.
The case for Block
Block has also seen its shares tumble from recent highs, and, like Shopify, trades at levels not seen in two years as the market rotates out of high-flying pandemic tech names into more basic consumer staples. But investors should not be worried.
The point-of-sale device maker formerly known as Square also made its name for itself helping small- and medium-sized businesses stand on equal footing with their enterprise-class rivals. Over the years it has improved its technology and added to the functionality of its services, and that has attracted the attention of those bigger businesses.
Mid-market sellers, or those that generate more than $500,000 in annualized gross product volume (GPV) -- the total dollar amount of all card payments processed by sellers using Square -- now account for 37% of Block's seller GPV. That's up from 31% a year ago, and 28% in 2019.
But Block is looking to embrace the future of payments and is moving heavily into the world of cryptocurrency, hence the change in name from Square to Block. While the company says it references the building blocks it is providing to help grow businesses, it's obviously also a reference to blockchain technology.
Square was already involved with bitcoin trading through a bitcoin-focused financial services segment, and had previously announced it would build a decentralized bitcoin exchange, satisfying founder and CEO Jack Dorsey's fascination with crypto. It is also dedicated to advancing Bitcoin (BTC +0.25%) as the pre-eminent crypto through a separate entity named Spiral. Dorsey also just announced Block was "officially building an open bitcoin mining system."
Yet this new focus on cryptocurrency is weighing on Block's shares, as it seems to be going off-mission to its primary business. And as it becomes more closely aligned with crypto, its stock is starting to move in tandem with it. Crypto, of course, is now tumbling lower, with Bitcoin down 30% in the last month, along with Block's stock.
The verdict
Although cryptocurrencies look like they are here to stay, Dorsey's fascination with the coins and his hijacking Block away from its roots have convinced me the stock is just too risky. The stock currently trades at a price-to-earnings ratio of around 100 which is more than triple that of Shopify. At best Block will be subject to significant volatility as its fortunes rise and fall on crypto's acceptance and appeal to broader swaths of the market, which may or may not occur.
Shopify, on the other hand, remains laser-focused on its mission-critical technologies and continues to play to its strengths. It may not enjoy the surges Block's stock might see but also won't whipsaw like it either. In addition, it has a more relatively reasonable valuation. For that reason, I find Shopify to be the better buy.
