After giving up substantial value in 2022 and underperforming the broader markets, shares of technology companies, including Shopify (TSX:SHOP) and Lightspeed (TSX:LSPD), witnessed a recovery year to date. The moderation in the inflation rate and expectations of an easing monetary policy lifted investors’ optimism on tech stocks.
With the improving macro backdrop and the ongoing shift in selling models towards omnichannel platforms, these Canadian stocks are poised to deliver solid growth in the coming years. As both Shopify and Lightspeed have solid growth prospects and fundamentally strong businesses, let’s delve deeper to understand which could deliver higher returns.
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Shopify
Shopify stock is up about 83% year to date, outperforming the TSX by a wide margin. The company provides internet infrastructure for commerce platforms and benefits from its ability to generate higher gross merchandise volumes and revenues, despite macro headwinds. Further, the company is growing its merchant base and focusing on improving profitability and free cash flows, which augur well for long-term growth.
The company’s gross merchandise volumes increased 17% year over year to US$55 billion in the second quarter (Q2) of 2023. Meanwhile, its top-line growth accelerated to 31% in Q2 compared to an increase of 25% in Q1. What stood out was the improvement in its attach rate (it means a growing number of merchants are buying Shopify’s multiple solutions). Further, the company generated positive free cash flow for the third consecutive quarter.
Shopify will likely benefit from the ongoing digital shift, increased adoption of its innovative products, a growing merchant base, and an improved attach rate. Moreover, its focus on reducing margin pressure with an asset-light model bodes well for future growth. Shopify stock has gained significantly so far this year. However, it is still trading at the next 12-month (NTM) enterprise value/sales ratio of 10.3, much lower than its historical average, making it an excellent investment near the current price levels.
Lightspeed
Like Shopify, Lightspeed is likely to benefit from the digital shift. It offers a cloud-based commerce platform that helps small- and medium-sized businesses to engage with customers, manage their operations, and accept payments. It primarily generates revenues by selling cloud-based software subscriptions and payment solutions. Further, it offers two flagship solutions focusing on restaurant operators and retailers.
Despite the macro weakness, Lightspeed has consistently delivered solid growth, driven by higher GTV (gross transaction volume) and an increase in GPV (gross payment volume). The demand for Lightspeed’s products is likely to increase, as the retailers and restaurant operators increase spending on the modernization of their payments platform and expand to newer locations. Moreover, the company is streamlining its operations and targeting large customers with higher GTV, which will lower the churn rate and drive average revenue per user (as large customers can adopt its multiple modules).
Lightspeed will also likely benefit from its focus on accretive acquisitions. These acquisitions enhance its market share, drive its customer locations, and help to expand its product base.
While Lightspeed would benefit from increased demand and focus on improving profitability, its stock is trading cheap. LSPD stock is trading at a NTM enterprise value-to-sales multiple of 1.7, much lower than its historical average, presenting an excellent buying opportunity near the current levels.
Bottom line
Both Shopify and Lightspeed have solid growth prospects, are poised to gain from the ongoing digital shift and appear attractive on the valuation front. However, Shopify’s large scale, focus on innovation, growing merchant base, and ability to grow rapidly makes it more appealing.
