Amazon (AMZN 2.71%) and Shopify (SHOP 6.04%) are two of the largest e-commerce stocks, and they have both produced tremendous long-term returns for investors. Shopify has gained over 5,000% in the ten years since November 4, 2015, while Amazon is up by over 700% during the same timeframe.
Amazon grew its business by selling everything under the sun and diversifying into additional opportunities, such as cloud computing and online advertising. Shopify focused on enabling merchants to create online stores and sell their products instead of having inventory and warehouses.
Although both e-commerce stocks offer excellent long-term prospects, one of them stands out as the winner.
Amazon is more diversified
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Most people think of Amazon's e-commerce store, which makes it easy to buy millions of products, but the company has quietly diversified into several growth opportunities. The company acquired Whole Foods in 2017 to expand its physical footprint. It had other physical locations like a bookstore and a clothing store, but Amazon closed them to focus on grocery stores.
It also lets third-party sellers list their products on Amazon, similar to what Shopify allows for its merchants. However, Amazon's two biggest growth opportunities are Amazon Web Services and online advertising, which went up by 20% and 24% year-over-year, respectively, in the third quarter.
Online ads and AWS represent more than 25% of the company's total revenue, and cloud computing revenue can continue to accelerate due to strong AI demand. For instance, OpenAI and Amazon recently agreed to a $38 billion deal that gives OpenAI access to additional cloud computing capacity from AWS.
Overall revenue rose by 13% year-over-year, with those segments playing key roles. Amazon is also investing heavily in artificial intelligence, hoping to capture a future trend the same way Amazon became the cloud computing leader by launching AWS in 2006. Its custom AI chip, Trainium2, grew by 150% quarter-over-quarter and is now a multi-billion dollar business. If AI tailwinds continue to accelerate, Trainium can be a key growth driver like online ads and AWS.
Shopify is growing at a faster rate
Shopify is growing at a faster rate than Amazon due to its successful e-commerce model and the fact that it's a smaller company. It's easier for Shopify to build on its $2.8 billion in Q3 revenue than it is for Amazon to build on top of its $180 billion in Q3 revenue. Making an extra $1 billion per quarter would do wonders for Shopify's growth rates, but for Amazon, that same amount wouldn't make much of an impact on revenue growth rates.
Shopify posted 32% year-over-year revenue growth in the third quarter, which was higher than Amazon's growth rate. Merchant solutions and subscriptions are Shopify's two revenue sources, which grew at 14.6% and 38.2%, respectively. It's good to see merchant solutions growing at a faster rate since that segment makes up almost 75% of Shopify's total revenue.
The subscription model results in high annual recurring revenue for Shopify, and high switching costs mean most customers will continue to use Shopify. It's hard to justify all of the time it would take for big companies to move away from Shopify and migrate to another option.
Choosing between Amazon and Shopify
Shopify is growing at a faster rate and enjoys higher profit margins than Amazon since it has fewer overhead costs. While Shopify posted a 33.8% net profit margin in Q3, Amazon only delivered an 11.8% net profit margin. A focus on digital software gives Shopify an edge with margins, while Amazon's e-commerce model has lower margins. Online ads and AWS have helped a bit, though.
However, Shopify's faster growth rate and higher year-to-date gain aren't enough to make it a clear winner. It's a closer battle when investors consider Amazon's diversified opportunities and valuation. Amazon is a cloud computing leader that is at the forefront of artificial intelligence. Its Trainium2 AI chip is growing at a rapid rate, and Amazon has more backup routes if e-commerce sales growth decelerates. Shopify doesn't have that luxury if e-commerce growth decelerates.
Amazon trades at a 33.90 P/E ratio compared to Shopify's 84.06 P/E ratio. Amazon has a better valuation, which results in a better margin of safety for investors, and that also holds true for the forward P/E ratio. Shopify's 82.64 P/E ratio is almost three times higher than Amazon's 28.57 forward P/E ratio.
Amazon is the safer stock of the two due to having more revenue streams, with some of them accelerating. The OpenAI partnership further validates Amazon's leading position amid the AI boom, which can translate into renewed revenue acceleration in the upcoming quarters. Shopify is great too, but if revenue for its merchant solutions decelerates, it has limited growth opportunities beyond that, and the valuation may come under pressure.
Both e-commerce stocks look solid, but Amazon is the winner.