I couldn’t think of any retail industry stocks more different than the two under comparison today.
On one side, you have Shopify (TSX:SHOP), a fintech platform that makes it easy for almost anyone to start an online store and sell products worldwide. This company provides everything from payment processing to shipping logistics, helping small business owners succeed online.
On the other hand, there’s Walmart (NYSE:WMT)—a company that’s been around since 1945 and is well-known for its large discount stores. With a significant portion still owned by the Walton family, Walmart offers a wide range of products at low prices and has a huge presence worldwide.
So, which of these very different companies is the better buy right now? Keep reading for my take on which stock might be the better investment opportunity.
Why I don’t like Shopify
You might disagree with me here, and that’s perfectly fine, but based on my investment goals and how much risk I’m willing to take, I wouldn’t buy Shopify.
Firstly, Shopify’s beta is 2.2. This is quite high and indicates that the stock is more than twice as volatile as the market. This level of volatility can make for a real rollercoaster experience, which isn’t something I’m comfortable with.
Despite a recent 20% drop in its stock price after earnings, Shopify still appears overvalued with a forward P/E ratio of 62.1. This gives it an earnings yield of just 1.61% which, frankly, is lower than what I might earn from the interest in a chequing account. This low return doesn’t justify the high risk for me.
It’s not that Shopify is a bad company. In fact, they’re quite solid financially. They have a lot more cash than debt on their balance sheet – $5 billion in cash compared to $1.2 billion in debt as of the most recent quarter.
They also generate strong free cash flow. If they reduced their R&D spending, their currently low profit margin of 1.9% could potentially align more closely with their operating margin of 22.5%.
However, I believe the price is too steep right now. No matter how good a company is, if you pay too much for it, the investment might not yield the returns you expect. I’m fine with paying a fair price for quality, but this ain’t it.
And finally, there’s also the fact that Shopify doesn’t pay a dividend. For me, and many of my readers, dividend income is an important factor in choosing investments because it contributes to steady cash flow.
Why I like Walmart
Some of my readers may not remember, but at the end of 2008, during the height of the Great Recession, Walmart was an anomaly in the stock market – it actually finished the year up by 20%. How did this happen?
Walmart’s business model, which focuses on high volume and low prices, especially in essential categories like groceries and household staples, resonates well during economic downturns when consumers prioritize value and necessity over luxury.
Though it contends with the typically thin profit margins of the retail sector (operating margin at 4.2% and profit margin at 2.4%), Walmart effectively uses its shareholder equity – an impressive ROE of 18.6%.
To put this in simpler terms, imagine if you invested $100 in a company, and that company returned $18.64 in profit from that $100 in a year. That’s a strong performance, especially in the retail industry where margins are tight.
Then there’s the dividend. While a yield of 1.37% as of May 10 might not seem very high, the consistency and growth of Walmart’s dividends are what stand out.
The company is a recognized “Dividend King,” having raised its dividend for 50 consecutive years. With a payout ratio of just 39.8%, the dividend is not only sustainable but also has room to grow in the future.
