2022 was a brutal year for the e-commerce industry. A slowdown in online shopping and wavering confidence in the economy sent most e-commerce stocks plunging -- including two of the top e-commerce stocks, Etsy (ETSY 2.65%) and Shopify (SHOP +1.93%), which fell by about 45% and 75%, respectively, last year.
With both stocks trading at discounted pricing, is now the time to invest in these leading e-commerce stocks? And if so, which stock is more worthy of your investment right now? Let's take a closer look at both stocks to see which is the better buy.
Same industry but very different business models
While Etsy and Shopify are online e-commerce platforms, but they operate in very different arenas.
Etsy specializes in handcrafted and unique goods. The platform currently dominates this niche industry, helping pair creative sellers with 89 million buyers across the world on its website.
NYSE: ETSY
Key Data Points
Shopify helps merchants sell products on their own websites with its e-commerce software. In this respect, each merchant that uses Shopify sells their own goods, using the tools and resources provided by Shopify to reach and convert buyers more efficiently. Shopify's e-commerce infrastructure serves small businesses, single entrepreneurs, and massive corporations.
2022 was a sluggish year for both companies thanks to supply chain issues disrupting product deliveries, inflation impacting operational costs, and online shopping returning to lower, more normalized levels following the pandemic boom of 2020 and 2021. Year-over-year growth for both companies fell short compared to the two years prior.
NASDAQ: SHOP
Key Data Points
Etsy's gross merchandise sales (GMS) were down 1.3% compared to 2021, and it ended the year with a net loss of $694 million compared to a net profit of $493 million the year before. Despite its lackluster earnings last year, the stock is still up notably on a three-year (pre-pandemic) basis.
Shopify's gross merchandise volume (GMV) which works similarly to Etsy's GMS, was up 12% year over year, although the company still reported a net loss of $3.47 billion compared to a net profit of $2.89 billion the year before.
Which stock looks like the better long-term winner?
It's likely both stocks will continue to feel pressure from a challenging macroeconomic environment over the next few years. Inflation is still a major concern, recessionary fears are only increasing, and online shopping will likely remain near 2022 levels.
Therefore, to determine which is the better buy between the two, we need to look at each company's long-term growth opportunities as it relates to its current operations and pricing value.
Data source: YCharts, Shopify, and Etsy. Chart by author.
Right now, Etsy has the upper hand on operations. The company's take rate (the income it earns for each product sold through its platform) at the end of 2022 was 20%, while Shopify's was 2.7%. This indicates Etsy earns more per sale for products sold on its platform or software and gives it a much better margin for reaching profitability in the future. Etsy's gross profit margin is also in the 70% range, while Shopify's is around 50%.
In terms of long-term growth opportunities, I believe both companies will equally benefit from the rise in online shopping over the next 10 to 20 years. E-commerce penetration is expected to grow at a clip of 8% on a compounded annual basis by 2030, and both companies have barely touched the surface of market penetration.
Etsy's niche products give it a competitive advantage, as no other e-commerce platform has been able to replicate the unique products Etsy offers at that scale. Plus, the company recently increased the fees it charges its sellers, which will help drive more revenue in 2022, even if shopping remains at the same levels or dips slightly compared to last year.
Shopify is investing heavily in logistics infrastructure to help it compete and better serve its customers. While it's a low-margin opportunity right now, it could give the company a major competitive advantage down the line.
Shopify is experiencing a serious rally, rising 30% since the start of 2023. Etsy, on the other hand, declined 23% during that same period. While a lower share price doesn't always indicate better value for a stock, it does in this case. Etsy's price-to-forward sales ratio (P/S) is around 4.7 times, while Shopify is trading at 8.6 times its sales.
If you're looking for long-term growth stocks in the e-commerce industry, both Shopify and Etsy have a massive opportunity to run over the next 10 to 20 years, meaning they are both worthwhile buys. However, given Etsy currently has more favorable operational metrics and slightly better pricing, I'd say Etsy is the better buy of the two today.
