Amazon (NASDAQ:AMZN) has a current market capitalization of $1.16 trillion. Shopify’s (NYSE:SHOP) is less than one-tenth of the size. Yet, if you compare both companies’ latest quarterly reports, some might consider Shopify to be a better buy than Amazon stock.
Here are my two cents on the subject.
My Past Views About Amazon Stock
The last time I wrote about Amazon was in early April. If you follow my writing, you know I’ve been on a bit of an anti-Bezos trip in recent months. The company, in my opinion, continues to make human resources mistakes that eventually will come back to haunt it.
These HR missteps have seen me go from being bullish about Amazon to somewhat lukewarm. Once I felt Amazon stock would get to $10,000 in a relatively short time. Now, I’m not so sure.
The company reported Q1 2020 results on April 30. Revenues were $75.45 billion, $1.84 billion better than analyst expectations. On the bottom line, it had earnings per share of $5.01, 20% less than the consensus estimate.
Not only did Amazon miss by $1.24 a share, but its Amazon Web Services (AWS) generated $10.22 billion in revenue, $110 million shy of analyst expectations. Remember that the first quarter’s numbers are through March 30. The stay-at-home orders generally started showing up in mid-March. California was the first on March 19.
AWS revenues in the first quarter grew by 33%. I will be shocked if they don’t increase by more in the second quarter as people remain at home for work. That said, the $110 million miss suggests other cloud providers are working hard to take market share.
Now, the big surprise from its first-quarter results was the admission by Amazon that it will spend all of its expected $4 billion operating profit in the second quarter on expenses related to the novel coronavirus – it plans to spend $1 in 2020 on Covid-19 testing – to keep employees safe while ensuring products get to customers.
We’ve seen this picture before. Amazon runs up the losses to make sure it captures the lion’s share of the marketplace. Once it’s clobbered the competition, it relaxes spending and reaps the free cash flow rewards.
Will that happen again?
Not if it keeps angering front-line employees. Recently, a vice president of AWS quit over the terrible job the company was doing reacting to disenfranchised employees protesting the level of care provided in the workplace.
“I quit in dismay at Amazon firing whistleblowers who were making noise about warehouse employees frightened of Covid-19,” Tim Bray stated in an April 29 blog post.
“What with big-tech salaries and share vestings, this will probably cost me over a million (pre-tax) dollars, not to mention the best job I’ve ever had, working with awfully good people. So I’m pretty blue.”
Kudos to Bray for standing up for his principles. Very few in corporate America do so.
Amazon continues to be the schoolyard bully. Eventually, people will wise up. Amazon is not the good guy you think it is.
In my April article, I stated, “While I still think it’s a buy for anyone who doesn’t care how a company treats its employees, you won’t see me buying its stock. Not until it cleans up its act.”
Nothing’s changed to alter my opinion. If anything, spending $4 billion in operating profits in the second quarter, and who knows how much in the third and fourth, without actually improving the corporate culture and workplace environment.
As a shareholder, I would be seriously irked if it eliminated profits in the near-term without any long-term benefits to show for it in 2021.
As for Shopify …
As I write this, Shopify has just released its first-quarter results, and they were excellent.
On the top line, Shopify reported quarterly sales of $470 million, 47% higher than last year, and well above the analyst estimate of $440 million. Further down the income statement, it had an adjusted operating loss of $7.3 million; analysts were expecting a loss upwards of $30 million.
“Overall, the report confirms the recent bullish narrative that Covid-19 has ultimately been a net tailwind for Shopify, with merchant adds and GMV trends still topping expectations despite the pandemic,” Raymond James analyst Brian Peterson wrote in a note to clients.
In the company’s press release, it stated that the number of stores created on the Shopify platform in the six weeks between March 13 and April 24, grew by 62% after the company extended its free trial from 14 days to 90 days.
The downside of this extension is that it’s hard to know how many new clients will continue to generate sustainable revenues after Covid-19. Interestingly, the company said that retail merchants were able to replace 94% of their point-of-sale (in-store) gross merchandise volume (GMV) with online revenue.
Who says the omnichannel experience doesn’t make sense?
Bottom line: Shopify recently introduced its new shopping app that helps consumers search for and buy from local businesses. It’s indicative of how focused the company is on helping its customers win the omnichannel battle.
The Bottom Line: AMZN vs. SHOP
By valuation, Amazon is clearly a cheaper buy than Shopify. However, from everything I’ve heard, Shopify treats its employees far better than Amazon.
If you’ve got a conscience, Amazon stock is no longer the better buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.