While Etsy and Shopify serve the needs of different customers, they are both among the companies that have allowed individuals and small businesses to thrive in the eCommerce marketplace. Both of these companies trade at considerable discounts when compared to their 2021 highs but which one is the better investment today?
started the year on a low-growth note. Revenue advanced just 5.2 percent
year-over-year to $579.3 million in Q1, and EPS was $0.60 per share. However, both of these metrics were modest beats
when compared to analyst expectations. The consensus estimate suggested that revenue would be about $4.5 million lower and that EPS would be $0.59.
Margins were more negative, however, with non-GAAP EBITDA margin declining from 33 percent in Q1 2021 to 27 percent in Q1 2022.
Etsy operates in a large market, albeit one that is niche. According to the company, the addressable market for handmade and unique items in the countries Etsy serves was $100 billion
in 2019. Of that, Etsy maintained a market share of only about 5 percent.
Pandemic-related shifts in consumer behavior toward buying online and favoring unique, personalized items have likely only expanded this market in the intervening three years.
The main risk for Etsy seems to be its lack of near-term growth prospects
. While Etsy massively expanded its user base during the COVID-19 pandemic, there’s a very good chance that reopening will not be kind to the craft marketplace. Users who were stuck at home may now find better places to spend their money, leaving Etsy struggling to maintain the momentum it has built over the past two years.
Despite its slow growth and shrinking margins, Etsy has very bullish sentiment from analysts. The median target price for Etsy
based on 17 forecasts is $175, a gain of 94.1 percent against the current price of $90.51. Even more impressive is the fact that the lowest target is $95, up 5.4 percent. This suggests that Etsy is a relatively low-risk stock that will rise over the next year under almost any foreseeable circumstances.
Monthly recurring revenue, a key component of Shopify’s revenue model, also grew at 17 percent. The company also announced a $2.1 billion acquisition deal for Deliverr, an eCommerce fulfillment firm. This represented the largest acquisition in its history.
The picture, however, wasn’t all positive. To begin with, the company posted a net loss of $1.5 billion
, a considerable reversal from the $1.3 billion positive net income it achieved in Q1 2021. Much of this was due to declines in investment holdings, but the losses are still slightly concerning.
Shopify also had a massive earnings miss, generating adjusted earnings of just $0.20 per share on analyst expectations of $0.64.
Shopify is, however, in a very similar situation to Etsy with regards to analyst price forecasts. The median target price for Shopify
is $817, up 98.8 percent from the most recent price of $411.00. The lowest price target is $460, a gain of 11.9 percent. This gives Shopify slightly more upside than Etsy, especially on the low end of the target range.
Shopify is also in a market with ample room remaining to grow. The addressable market for the company is about $153 billion
, of which Shopify has captured just 3 percent so far.
Although the company’s growth has slowed coming off of the pandemic, Shopify still has plenty of room to run as eCommerce continues to expand. This available market should benefit Shopify substantially in the coming years.
The biggest risk for Shopify at this point is the increasingly competitive nature
of the eCommerce industry. With larger companies rapidly moving to shore up their positions in the digital marketplace, the SMBs that make up most of the Shopify user base could begin feeling the pinch.
Although Shopify does have some larger businesses among its customers, the company is relatively exposed to the effects of competition on smaller sellers.
Etsy vs Shopify Stock: Which Is Better?
This is a difficult choice to make, as both Etsy and Shopify have considerable investment potential. Despite being in slightly worse shape coming off of Q1 reporting, however, Shopify is likely the superior stock of the two.
To begin with, Shopify’s massive cash holdings give it ample room to invest in future growth. In its Q1 reporting, Shopify detailed $7.25 billion in cash, cash equivalents and marketable securities. This gives it a huge buffer against future slowdowns and more latitude to expand its current offerings.
Shopify also has the advantage in terms of growth. If we don’t take the earnings miss into account, Shopify’s Q1 results were undeniably better than Etsy’s. The company is still turning in double-digit revenue growth, compared to Etsy’s much more modest 5.2 percent. While Etsy may catch up in the long run, it’s hard to ignore Shopify’s edge at the moment.
One area where Etsy does handily beat Shopify, however, is in value. Etsy trades at a P/E ratio of 33.5, compared to a ratio of over 150 for Shopify. It’s worth noting, however, that Shopify’s extremely high ratio reflects the massive earnings miss of Q1. Even so, Etsy is probably the more reasonably priced of the two at the moment.
In the end, both of these stocks are likely good buys. Shopify, however, has better near-term growth prospects and a bit more potential upside over the next 12 months. Coupled with its generous cash reserve, this likely makes Shopify a somewhat better buy. With that said, investors who are concerned with Shopify’s earnings miss in Q1 or valuation could turn to Etsy as a somewhat lower-risk option and still have a good chance of realizing substantial returns.
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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.