Don’t call it a comeback, but e-commerce is finally a growth sector again. Investors avoided the industry due to a collapse in demand in late 2022 to early 2023 after huge gains during the pandemic.
However, sales are now rising again, and this increase is benefiting stocks Amazon (AMZN 1.41%) And Shopify (BUSINESS 3.03%) regain some lost ground. Both stocks are valued at a discount compared to the peak of the pandemic, but which stock is a better fit for your portfolio? Let’s dive right in.
Buy Amazon for the services
In the long list of reasons an investor might want to own Amazon stock, e-commerce probably doesn’t make the top five. Among the more exciting factors supporting the company today is its services segment, which is becoming increasingly valuable thanks to artificial intelligence becomes (AI) tech. The AWS platform is also still early in its growth curve and has many more years of profits ahead as companies move to cloud-based infrastructure.
Of course, Amazon isn’t growing nearly as fast as Shopify. Amazon sales are expected to remain roughly flat this year, while most Wall Street experts expect a rise of over 20% for marketplace platform specialist Shopify.
However, when you take a closer look at Amazon’s services segment, the picture changes. This area is currently responsible for more than half of sales and is growing significantly faster than the e-commerce area. Amazon’s services business is highly profitable and provides cash flow that can be channeled into high-yield growth investments. As a result, the stock could see big returns as its operating profit margin breaks out of the low single digits in the coming years.
Buy Shopify for innovation
Shopify stock offers similarly good prospects for increasing profit margins and cash flow. Of course, the security that Amazon brings with an annual turnover of over $500 billion does not exist. But in return for this increased risk, there is the potential to benefit from significant improvements to Shopify’s business in the coming years.
After all, business looks very different than it did a year ago. Shopify recently exited the logistics and fulfillment niche, which immediately reduced costs and allowed the company to focus on higher-return areas around its platform services.
Merchants love the broader service offering, which includes major new revenue streams like payment processing, as shown by rising subscription revenue. Investors are rightly excited to see where Shopify’s business is headed, as the company stands to benefit from its software-as-a-service sales model in the coming years.
The better price
The biggest risk for investors is simply paying too high a price for these well-positioned companies. This is more of a problem for Shopify, which is valued at 14 times annual revenue. A growth stock investor might own a tech giant Microsoft for a cheaper premium.
Amazon price today is 2.7 times sales, which is close to its 2023 peak. Still, investors paid more than four times sales before the pandemic hit.
This discount seems to make the tech giant the preferred choice here. With Amazon you get access to excellent growth niches and increasing profitability. However, you don’t have to take the risk that comes with Shopify’s less established business. So for most investors, Amazon is the better stock to buy today.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitri Kalogeropoulos has positions at Amazon and Shopify. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.