Wall Street likes marketplace platform stocks for many reasons. Unlike vertically integrated e-commerce giants like Walmart, which have to maintain large distribution networks, inventory, and logistics arms, these businesses carry lower risks and require far less capital to run.
Companies like Etsy (ETSY 0.34%) and Shopify (SHOP 1.11%) can also be highly profitable once they reach a given scale. Marketplace fees can rise over time, for example, as their portfolios of seller services grow.
But which of these two stocks looks like the better buy right now? Let's dive right in.
The reasons to buy Etsy
Etsy is a more niche player in the e-commerce marketplace industry, but there are some good reasons to like the stock. The company recently returned to growth in its important active buyer metric after two quarters of declines, the result of a growth hangover following pandemic surges. This stabilization could be a prelude to accelerating volume gains ahead, all supported by a flood of new product introductions and new marketing spending through 2024. "We believe that Etsy can be more relevant, more often, to millions of more buyers around the world," CEO Josh Silverman said in early May.
And unlike Shopify, Etsy is consistently profitable, with the exception of Q3 2022 when the company recorded a $1.0 billion impairment charge against the value of its Depop and Elo7 acquisitions. Management rolled out increases to its seller transaction fees last year, and if volume trends do improve over the next several quarters, operating margin has a good shot at climbing back toward the highs that shareholders saw during the pandemic of roughly 25% of sales. eBay, after all, enjoys an operating margin above 22% today.
The reasons to buy Shopify
Shopify will appeal to investors who prefer a clearer path toward growth. The company already has a prime position in e-commerce, handling roughly 10% of online transactions in the U.S. Sales were up a solid 27% in the first quarter (versus Etsy's 11% increase). Shopify is further along in its journey of widening its platform services, too, and success building out this portfolio has resulted in more merchants boosting their annual spending commitments.
Yes, the company is losing money right now, but it is generating free cash flow and has recently exited the costly logistics business. As a result, investors are looking forward to Shopify's move toward sustainable profitability over the next several quarters.
Looking ahead
Both companies are due to report second-quarter results in August. But heading into those announcements, Etsy appears to be the more attractive value. You can own the stock for less than 5 times sales, near its lowest level in five years. Meanwhile, enthusiasm around Shopify's strategic pivot has helped push its valuation to nearly 15 times sales, which leaves little margin of error for investors. The company can afford no hiccups if it wants to build on the stock's 90% gain so far this year.
The growth stocks are both likely to be solid additions to your portfolio over the long-term as more consumer purchasing moves toward the digital and hybrid selling channels. Cash returns will be especially strong in these asset-light businesses, just as they are with eBay. Yet if you're looking for a deeper value today, though, consider Etsy stock over Shopify.
