Despite the Corona virus sell-out, the shares of the two retail service providers Shopify (WKN:) and Square (WKN:) are in the lead for the year: The Square share has risen by 33.2% since the beginning of the year, with Shopify investors were even allowed to make a return of 37.6%. But where do the two stocks draw their strength from and which is the better buy for the future? Time for a foolish duel!
The business models Shopify started in 2004 and has its roots in e-commerce software that enables retailers to set up their own online shops. Today, web-based, social media-based and stationary sales channels can be integrated on the platform. The business of the Canadian company is divided into two segments: “Subscription solutions” generates income through the usage fees for Shopify’s platform and through the sale of optional add-ons and Internet addresses. “Merchant solutions” is the home for the remaining income, which comes from payment processing, the small loan offer Shopify Capital and the sale of hardware for payment acceptance for stationary retailers.
We are now exactly where the journey started for Square in 2009: With a square device that could turn any smartphone with a headphone jack into a payment terminal. Square derives its revenue from four sources: transaction fees from payment processing, revenue from the sale of hardware for payment acceptance in brick-and-mortar retail and revenue from subscriptions and other services.
These include solutions for personnel and goods management, Square Capital, the web hosting service Weebly and the private customer application Cash App, which is a kind of mobile bank account and through which users can also buy Bitcoin . The latter is Square’s fourth source of revenue. As you can see, the two companies started in very different markets, but now have very similar business models.
The payment Shopify had sales of $ 1.58 billion in 2019, which was 47% more than in 2018. However, spending also increased to a similar extent, causing the operating loss to rise to $ 141 million. The positive thing was that the company generated positive free cash flow, albeit at a rather symbolic level of over $ 8 million.
The Canadians’ balance sheet is very liquid and the company is solidly financed, although investors should know that the company has been selling new shares over and over again in recent years to raise money, which is diluting the existing shares. Squares revenue grew 43% to $ 4.71 billion in 2019, with the high-margin subscription and services business making a significant contribution. This helped the Californians to reach the operating profit zone for the first time.
Free cash flow was $ 388 million. Square’s balance sheet is less liquid and equity-rich than that of its Canadian competitor. However, short-term liabilities are sufficiently covered by current assets and the company should have no problem servicing its $ 939 million long-term debt. What is striking is that Square draws more than twice as much sales and therefore also earnings potential from Shop dollar as a balance sheet total. Overall, I like Squares’ figures much better than Shopify’s, which is why the former company gets the point from me.
The ratings Finally, let’s take a look at the valuations of the two stocks to see if either one could be a buy. Neither of them are cheap. But in the context of finance,
let’s see which stock looks cheaper. market capitalization Price-to-sales ratio (KUV) Price-cash flow ratio (KCF) expected earnings growth until 2024 Shopify $ 53.9 billion 34.2 759 50% pa Square $ 36.3 billion 7.7
I was a little surprised when I saw these numbers. Sure, Shopify is a bet on e-commerce services compared to Square. Shopify thus primarily serves a growing market compared to the rather stagnant stationary retail trade. However, Square is also increasingly penetrating Shopify’s target market, as we saw earlier. Conversely, Shopify’s push into Square’s target market also proves that there is still a lot to be gained there. That’s why I think Square is valued much more attractive at the moment, which is why the stock takes the point here.
Final score: 3: 1 for the square from California In the end, the Shopify share of the Square share has to give up 3: 1. Both companies have very promising and high-growth business models. Ultimately, Square convinced me because of the more attractive finances and the significantly cheaper valuation.
Does the Shopify share have to do worse because of this? Not at all! If the company increases sales and margins faster than expected and can squeeze out competitors like Square, there is nothing to prevent the stock from performing well over the next few years. Still, shareholders should be aware of the risks and keep in mind that Square may get them more for their money.