Earlier this year, Shopify (NYSE: SHOP) overtook eBay (NASDAQ: EBAY) as the second largest e-commerce platform in the United States by sales volume after Amazon (NASDAQ: AMZN).
It was a huge blow to eBay, the world’s leading online auction platform for person-to-person transactions. It also explains why Shopify shares have climbed over 3,700% over the past five years. During that same time period, eBay shares rose 76% and Amazon shares rose 375%.
Investors may be reluctant to buy Shopify shares at this time, as they are trading over 290 times future earnings. Meanwhile, eBay’s shares are trading for 14 times future earnings, which could make it tempting as a value game. However, it makes more sense to pay a premium for Shopify than a big discount for eBay, for three simple reasons.
1. Old e-commerce versus new e-commerce
The eBay platform was once considered revolutionary. But today you face stiff competition from outside sellers on Amazon, Etsy, and other similar markets. Social media platforms like Pinterest and Facebook on Instagram are also integrating online shopping into their sponsored posts.
Shopify’s decentralized approach allows merchants to grow online without weakening their identity, and as the business grows, it’s easier to grow. In contrast, merchants typically need to buy promoted listings to stand out in busy eBay marketplaces.
2. Fortune favors the brave
eBay has scaled back its activities over the past five years. It separated from PayPal in 2015, closed its fixed-price subsidiary Half.com in 2017, sold its online ticketing platform StubHub in February, and plans to sell its online classifieds platform by the first. quarter 2021.
eBay also cut its marketing spend last year. The goal was to increase profit and take rate, the percentage of each sale you keep as income, rather than maximizing the gross merchandise volume (GMV). Its prioritization of earnings over growth, along with its dividends and buybacks, strongly suggests that eBay is a mature tech company with limited growth prospects.
Shopify has grown significantly since going public in 2015. It acquired product development and digital consulting company Boltmade in 2016, drop-shipping platform Oberlo in 2017, and automation company from 6 River Systems warehouse last year.
The company has partnered with Amazon to allow merchants to sell products on Amazon from their Shopify stores. It added similar integrations with Facebook, Alphabet’s Google, Snap’s Snapchat, and ByteDance’s TikTok. It has also beefed up its Shopify Plus premium tier for large merchants.
Shopify has also developed its own payment platform, Shopify Payments, which processed almost half of its GMV in the last quarter. It launched its own compliance network last year. Finally, it offers additional services through its own application store for online stores. All of these aggressive moves indicate that Shopify is still expanding.
3. Shopify grows much faster
EBay’s revenue rose only 1% last year, with its GMV falling 5%. It blamed this slow growth on reduced marketing spend and higher internet sales taxes in several states in the U.S.
Its adjusted net income only rose 5%, but major buyouts increased its earnings per share by 22%. This year eBay expects revenue to grow 19-20% after ruling out its divested business and currency headwinds.
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