Saturday, 8 June 2024

Best Stock to Buy Right Now: Amazon vs. Shopify

by BD Banks

Best Stock to Buy Right Now: Amazon vs. Shopify

Both Amazon (NASDAQ: AMZN) and Shopify (NYSE: SHOP) are incredible businesses. Both target e-commerce spending, which has grown at double-digit percentage rates for years, and is expected to do so for years to come.

When it comes to high-upside stocks, both of these companies fit the bill. But which stock has the potential to deliver the biggest profits to those who buy in today?

Amazon has achieved greatness — and that’s a bit of a problem

Amazon needs no introduction. It’s one of the largest online retailers in the world. Its market cap is nearly $2 trillion. Last year, the company posted annual sales of $575 billion.

But it wasn’t always this way. In the late 1990s, Amazon’s total valuation was under $1 billion. In fact, the company almost went bankrupt during the dot-com crash.

If you had invested $1,000 in Amazon when it began its time as a public company and held on, that small initial holding would now be worth roughly $1 million. Of course, that hypothetical return would have been powered by Amazon’s incredible growth. But it would also have been a function of investing early. At its lowest, Amazon’s market cap was around $450 million. It’s not just investing in a great company that produces a huge result, but investing in a great company before most of its growth has occurred.

Analyzing Amazon’s valuation over the years demonstrates this lesson well. At the start of 2016, Amazon’s market cap was around $300 billion. Over the next four years, it tripled in size to roughly $900 billion. Over the next four years, however, the company grew in size by just 70%. That’s still a respectable return, but the lesson — what the business world calls “the law of large numbers” — is clear: The bigger a company grows, the harder it is for that company to maintain its prior growth rate.

To be fair, Amazon’s stock price has continued to beat the market for a far longer period than most anticipated. And it appears that good days are still to come for the company and its investors. Yet the law of large numbers suggests there’s a better investment option in the e-commerce space for those looking for maximum upside potential.

SHOP Market Cap data by YCharts

Shopify has room to grow behind the scenes

While Amazon focused on building a centralized, two-sided marketplace, Shopify has built an e-commerce platform that allows merchants to sell through their own individualized websites. You’ve likely shopped at Shopify-powered websites before, unaware that it was providing the platform that made everything possible on the back end. Through its platform, anyone can begin selling online within minutes, with design, inventory, advertising, content creation, and payment solutions ready to go.

Shopify’s total addressable market is essentially all of e-commerce minus the segment controlled by centralized platforms like Amazon or eBay. Given that global e-commerce spending as a whole is expected to surpass $6 trillion this year, that’s a giant opportunity. Shopify has built an early lead, too. In the U.S. market, it has a 28% market share — nearly as large a slice as its next two competitors combined.

After a recent share price pullback, Shopify has a market cap of just $79 billion. That’s less than 5% of Amazon’s current size. To be sure, Amazon has a variety of other businesses beyond e-commerce, including a massive web services division. But investors should expect the size gap between these two companies to narrow in the years and decades to come. Amazon is still a wonderful business, and likely a good investment. However, for Shopify to quadruple in value, it would only need to attain a $316 billion market cap. Amazon quadrupling in value would bring its market cap to $7.6 trillion. Which of those will happen first? My money is on Shopify hitting $316 billion.

Should you invest $1,000 in Amazon right now?

Before you buy stock in Amazon, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $741,362!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of June 3, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ryan Vanzo has positions in Shopify. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool recommends eBay and recommends the following options: short July 2024 $52.50 calls on eBay. The Motley Fool has a disclosure policy.