The Faceoff: Online shopping struggle — Shopify is luring businesses away, but Amazon has a more reasonable price-earnings ratio

Shopify making inroads in e-commerce business

Some investments take a little while to pay for themselves. But would you really want to wait almost half a millennium?

If you invest in Shopify, which is Canada’s largest company by market capitalization ($173.3 billion, at last count), that’s just what you’ll be getting. Shopify’s lofty share price, ($1,402.12, as of Thursday afternoon), means Shopify has a price to earnings ratio of 436.94. That means it would take just under 437 years for Shopify to earn that much money per share, based on current earnings levels.

Yes, there are other metrics to judge how good an investment a particular company might be. And yes, early-stage tech companies frequently have high PE ratios, as they attract investors keen on future growth. But a triple-digit PE ratio is eye-popping in almost any context.

Throw in the fact that Shopify is competing, among other things, against a global e-commerce juggernaut like Amazon, and it could make all but the most risk-taking investors squeamish.

And yet, it’s still a well-run, profitable company, pulling in net earnings of $123.9 million in the fourth quarter. Over the last year, it’s had a profit margin of just under 11 per cent. And it’s luring an increasing number of businesses eager to have their own-branded e-commerce site, rather than selling their wares on Amazon. Shopify also typically takes a much lower cut than Amazon. Charging companies just 2.9 per cent of each transaction (plus 30 cents) is admittedly a solid way of undercutting Amazon’s 30 per cent take. And as CIBC World Market analyst Todd Coupland points out, the potential market for Shopify’s services is huge. (Coupland estimates there are 50 million or more small- and medium-sized businesses that could be a fit for Shopify; up from the 1.7 million businesses it serves now).

Amazon a juggernaut moving into new business areas

It’s not just a river in South America any more.

It’s also an e-commerce site, media company, cloud-based web software service, and even bricks-and-mortar store company (hello, Whole Foods). It has made Jeff Bezos a very, very wealthy man (with a net worth of $181 billion U.S.) and a household name.

It’s got a market cap of a mere $1.6 trillion (U.S.). That’s more or less the size of the entire Canadian economy (give or take a few billion, but who’s counting?).

In the fourth quarter, earnings rose to $7.2 billion, up from $3.3 billion in the same quarter a year earlier. Revenue in the quarter was a staggering $125.6 billion.

So, everything’s great, right? Well, no. Even the company admits internally that Shopify is starting to make inroads on its business. So much so, that according to the Wall Street Journal, Amazon last year created a special committee called Project Santos, devoted to fighting back against Shopify. It’s also started to attract the attention of antitrust investigators, particularly in the European Union.

But even some of the more traditional business metrics look less than stellar for Amazon. Yes, compared to Shopify, it’s got a relatively reasonable-looking PE ratio of 75.1. But its profit margin over the last 12 months is just 5.5 per cent, just a hair over half its smaller rival’s figure. Perhaps most alarming of all is that it has exceedingly high debt levels. Amazon’s debt-to-equity ratio is a 108.4. Typically, investors get concerned when a mature company’s DE ratio rises above 2. (For comparison’s sake, Rogers’ proposed takeover of Shaw Communications set off alarm bells because it would boost Rogers’ DE ratio higher than the 2.029 it ended 2020 at).

The Bottom Line

Shopify’s has its gigantic rival a little bit rattled, but at its current prices, can hardly be considered a good buy. Amazon is huge, but is alarmingly leveraged. Let’s call this one a draw for now.