Better buy: Shopify vs. Square

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Over the years, Shopify (NYSE: SHOP) and square (NYSE: SQ) have become more and more similar and approach the same market from different perspectives.

Shopify initially focused on enabling e-commerce and then switched to point-of-sale (POS) solutions for physical retailers. Square did it the other way around, first launching mobile card readers for stationary retailers and then finding their way into online shops.

Despite their different origins, both investments have paid off. Shopify and Square stocks are up 900% and 295% respectively over the past three years. But which is the better buy today?

Image source: Getty Images

Shopify

In 2004 Tobias Lütke and Scott Lake set out to set up an online snowboard shop. However, they found the experience frustrating and ultimately unhappy with the outcome due to the lack of user-friendly tools. But that disappointment became the inspiration for a better idea: Shopify.

Lütke and Lake co-founded Shopify to simplify e-commerce. Driven by this mission, the company’s cloud-based software is a comprehensive solution that enables sellers to start, operate, and grow their business across physical and digital channels.

Shopify also offers merchant services like payment processing, shipping discount, and financing, all of which are aimed at making trading more accessible. The company is enjoying strong demand – and Shopify is now the retail operating system for 1.7 million merchants worldwide.

In addition, despite competition from companies like Amazon and Walmart, Shopify has consistently exceeded Wall Street expectations, posting impressive financial results like clockwork.

Metric

2017

Q1 2021 (TTM)

CAGR

revenue

$ 673.3 million

$ 3.4 billion

65%

Free cash flow

($ 16.3 million)

$ 615.4 million

N / A

Data source: Shopify SEC filings. TTM = trailing 12 months. CAGR = average annual growth rate.

Management currently puts Shopify’s market opportunity at $ 153 billion, but that number doesn’t take into account large companies (i.e., 500+ employees). That means Shopify Plus – a customizable trading platform for corporate customers – makes the company’s true market opportunity even greater.

This is especially noteworthy because Shopify Plus seems to be gaining traction. It currently supports over 10,000 companies including Fortune 500 companies like General electrics, Nestle, and PepsiCo. If this momentum continues, Shopify could be a trillion dollar company by 2030.

square

Like Shopify, Square started out solving a problem. In 2009, co-founders Jack Dorsey and Jim McKelvey introduced the now famous mobile card reader, a small dongle that enabled merchants to use their smartphones as point-of-sale systems and payment processing devices.

Since then, Square’s business has expanded into two distinct segments: the seller ecosystem and the cash app ecosystem, both of which have benefited from the growing popularity of digital payments and e-commerce.

Square hardware at the bakery's checkout counter.

Image source: square

Square’s seller ecosystem includes a range of hardware, software, and services that help merchants manage all aspects of their business, from payment processing and inventory to payroll and marketing. The company recently launched Square Online, which allows merchants to create online stores that automatically sync with physical retail locations.

On the other hand, the Cash App ecosystem is aimed at consumers and enables users to send, spend and invest money. Square integrated Bitcoin into the Cash app in 2018, thereby increasing customer loyalty. And last year, the company acquired Credit Karma Tax and added a mobile tax return solution to the Cash app.

In financial terms, Square has had impressive results over the past few years, although investors should note that low-margin Bitcoin sales skew sales numbers. Because of this, it makes more sense to consider gross profit.

Metric

2017

Q1 2021 (TTM)

CAGR

revenue

$ 839.3 million

$ 3.2 billion

50%

Free cash flow

$ 101.6 million

$ 16.5 million

N / A

Data source: Square SEC filings. TTM = trailing 12 months. CAGR = average annual growth rate.

Management currently estimates Square’s market opportunity at $ 160 billion, which leaves plenty of room for future growth. In particular, Square recently launched its seller platform in Ireland, which means its services are now available in six regions (including the US, UK, Canada, Japan and Australia). As trade continues to evolve, I expect both of Square’s ecosystems to grow rapidly.

The judgment

I’ll initiate this by saying I own both Square and Shopify. In fact, they are two of my biggest holdings and I am very optimistic about the future of both companies.

Shopify wins this competition, however. The company is growing faster and has established itself in 175 countries, far more than Square. Ultimately, I think this offers more benefits for investors.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.



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