Shopify Stock vs. Etsy Stock: Which Growth Stock is the Best Buy?

Shopify Stock vs. Etsy Stock: Which Growth Stock is the Best Buy?

Table of Contents:

1. Introduction
2. Revenue Growth Comparison
3. Cash Flow from Operations to Sales
4. Operating Profit Margin
5. Valuation Comparison
6. Shopify's Decision to Invest in Shipping and Handling
7. Shopify's Divestment and Potential Implications
8. Conclusion

Introduction

In this article, we will compare two popular growth stocks: Shopify and Etsy. We will analyze these companies based on various metrics to determine which one is the better buy. The comparison will include revenue growth, cash flow from operations to sales, operating profit margin, and valuation. Additionally, we will discuss Shopify's decision to invest in shipping and handling, its subsequent divestment, and the potential implications for the company. Finally, we will conclude with our recommendation for the better growth stock to buy.

Revenue Growth Comparison

When comparing the revenue growth of Shopify and Etsy over the past five years, it becomes apparent that Shopify has primarily experienced faster revenue growth. However, it is worth noting the significant boost in revenue that Etsy received during the pandemic. Etsy benefited greatly from the demand for custom-made masks, attracting millions of customers. Although not all of these customers remained, a substantial number stuck around, driving Etsy's revenue growth for several years.

Cash Flow from Operations to Sales

In terms of cash flow from operations to sales, Etsy demonstrates a clear advantage over Shopify. Over the trailing 12 months, Etsy boasts a significantly higher cash flow from operations to sales ratio compared to Shopify, with 25.87% and -0.19% respectively. Shopify's decision to invest in shipping and handling logistics and fulfillment impacted its profitability, leading to concerns about its ability to generate healthy profit margins.

Operating Profit Margin

The operating profit margin also highlights Etsy's superiority over Shopify. In the most recent trailing 12-month period, Etsy's operating profit margin stands at 14.47%, whereas Shopify reports a negative 15.54%. This metric further emphasizes the challenges Shopify faces due to its previous investment in shipping and handling logistics.

Valuation Comparison

When considering valuation, Shopify emerges as the more expensive stock. Its forward price-to-earnings ratio is approximately 10 times higher than that of Etsy. However, it is important to note that Shopify's earnings and cash flow may be volatile due to its investment in logistics and fulfillment, as well as its ongoing divestment. Despite this, Shopify's higher valuation is reflective of its higher potential and larger total addressable market.

Shopify's Decision to Invest in Shipping and Handling

Shopify's decision to invest in shipping and handling logistics and fulfillment caused concerns among investors. The low profit margins associated with this segment, as evidenced by Amazon's struggle to generate healthy margins, led many to question Shopify's ability to achieve profitability. Consequently, some investors decided not to own or recommend Shopify during this period.

Shopify's Divestment and Potential Implications

Fortunately, Shopify eventually recognized the challenges of its investment and decided to divest the shipping and handling segment. While the process of unloading this part of the business may be messy, there is hope that cash flows and operating margins will improve afterwards. This move may restore faith in Shopify's profitability prospects.

Conclusion

Considering all the analyzed metrics, our recommendation for the better growth stock to buy is Etsy. Although Shopify has shown faster revenue growth, Etsy's superior cash flow from operations to sales, operating profit margin, and more favorable valuation make it a compelling choice. However, investors should remain attentive to Shopify's divestment process and monitor the potential implications on its financial performance.

Highlights:

• Shopify primarily experiences faster revenue growth than Etsy.
• Etsy received a significant revenue boost during the pandemic.
• Etsy demonstrates a clear advantage with higher cash flow from operations to sales.
• Shopify's investment in shipping and handling logistics raised concerns about profitability.
• Etsy's operating profit margin surpasses that of Shopify.
• Shopify is more expensive than Etsy based on forward price-to-earnings ratio.
• The divestment of Shopify's shipping and handling segment may improve cash flows and operating margins.
• Despite Shopify's higher valuation, Etsy is recommended as the better growth stock to buy.

FAQ:

Q: Why did Etsy experience explosive revenue growth during the pandemic? A: The demand for custom-made masks contributed to Etsy's significant revenue growth during the pandemic.

Q: How does Shopify's decision to invest in shipping and handling logistics affect its profitability? A: Shopify's investment in shipping and handling logistics presented challenges in generating healthy profit margins, similar to the difficulties faced by Amazon in this segment.

Q: What are the potential implications of Shopify's divestment of its shipping and handling segment? A: The divestment may result in improved cash flows and operating margins for Shopify, possibly restoring confidence in its profitability prospects.