Shopify (TSX:SHOP) stock and Alibaba (NYSE:BABA) stock are similar in many ways. Both are e-commerce companies. Both are involved in the payments business. And both are the largest tech companies (as measured by customer count) in their countries of origin.
As similar as Shopify and Alibaba are, there are many differences between the two companies as well. Shopify provides infrastructure for people to host their own e-commerce websites, Alibaba provides platforms for people to buy and sell on directly. So, there are enough differences to make the opportunities in SHOP stock and BABA stock worth comparing.
In this article, I will compare Shopify and Alibaba side by side to try to determine which technology stock is the better buy.
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The case for Shopify
The case for Shopify over Alibaba largely comes down to growth. In its most recent quarter, Shopify grew its revenue at 26%, Alibaba’s growth was near 0%. Obviously, Shopify is growing a lot faster than Alibaba is on the top line. When it comes to profit growth, the comparison is not so clear cut.
In its most recent quarter, Shopify’s gross profit increased by 11%, but its operating income and net income both swung from profits to losses. Alibaba, however, posted strong growth in all of its profitability metrics last quarter. The overall comparison is mixed, but I’d still say that SHOP stock is growing faster than Alibaba is, because BABA’s profit growth was mainly achieved by cost cutting. That kind of thing is not the kind of growth that growth investors typically have in mind.
The case for Alibaba
The case for choosing Alibaba over Shopify comes down to valuation and profitability.
Alibaba stock is far cheaper than SHOP stock. It’s currently trading at the following metrics:
- 13.6 times earnings
- 2.17 times sales
- 1.88 times book value
- 11.4 times operating cash flow
By contrast, SHOP trades at 10.25 times earnings and seven times book value. It’s much more expensive than BABA is.
Alibaba is also more profitable than Shopify. In the last 12 months, it boasted the following profitability metrics:
- 37% gross profit margin
- 12.3% EBIT margin
- 4% net margin
- 4% return on equity
By contrast, Shopify was not even profitable in terms of net income or operating income in its most recent quarter. I should also add that the margins calculated above were using GAAP earnings, which were much lower than its non-GAAP earnings. If you use BABA’s adjusted earnings then its profit margins approach double digits.
The verdict
Having looked at the virtues of Alibaba and Shopify side by side, I’m overall more comfortable holding Alibaba. As you can see in the disclosure below, I do, in fact, hold BABA, but I don’t hold Shopify. That’s because I find its mix of profitability and value more compelling than SHOP’s revenue growth, which is not translating into profit growth. BABA’s profit growth is better than SHOP’s.
Still, there is one last reason why an investor might prefer SHOP stock over BABA: risk.
Alibaba is a Chinese company, and China’s relations with the West have been strained lately. There have been major disputes over the status of Taiwan, disputes that some think could lead to a war. When Russia invaded Ukraine, many brokers simply stopped supporting Russian stocks, and Russia ordered the cancellation of dividend payments. So, you could say that BABA has a more extreme “worst-case scenario” than SHOP stock does.
