The optimistic long-term outlook for the internet industry is propelled by the substantial increase in online engagements and the rapid advancements achieved in 5G technology. In this context, this article compares the fundamentals of two leading internet companies, Shopify Inc. (SHOP) and Wix.com Ltd. (WIX), to determine which one is better equipped to thrive amid the industry tailwinds.
The burgeoning demand for digital services has created a fertile ground for sustained growth, with consumers increasingly relying on the internet for various facets of their lives.
Interestingly, since 2018, there has been a significant surge in daily additions to the online community, averaging around 900,000 individuals. By 2023, the global count of active internet users had exceeded 5.30 billion, constituting 65.4% of the world's population. As we move further in 2024, this number is expected to continue its upward trajectory, reaching a noteworthy 6.54 billion by 2025.
Furthermore, the swift progress in 5G technology has emerged as a transformative force, promising faster and more reliable connectivity, thereby unlocking new possibilities for innovation and seamless online experiences.
The size of the global 5G services market is positioned for remarkable growth, with an anticipated CAGR of 59.4% from 2023 to 2030, reflecting the increasing demand and adoption of this advanced technology on a global scale.
On top of it, the integration of Artificial Intelligence (AI) stands out as a transformative factor for Internet Service Providers (ISPs), representing a pivotal shift in their operational dynamics. AI introduces an array of tools and capabilities that have the potential to substantially elevate efficiency, security, and customer contentment for providers operating in this competitive sector.
Spanning from optimizing network performance and utilizing predictive analytics for capacity planning to enhancing customer interactions and fortifying security protocols, AI provides a multitude of advantages that are indispensable in the contemporary digital landscape.
Given the industry tailwinds, both SHOP and WIX stand to gain. However, in terms of price performance, WIX appears to have outperformed SHOP. For instance, WIX’s shares surged 21.4% over the past month to close the last trading session at $125.26. In contrast, SHOP’s shares gained 12.1% during the same period to close the last trading session at $81.30.
With all these factors in mind, let’s dive deeper into the featured Internet - Services stocks to get better clarity on which one is the better pick.
Recent Developments
On November 24, 2023, SHOP launched its Black Friday Cyber Monday (BFCM) Live Globe, an innovative feature that enhances the commerce experience during the BFCM period.
The platform provides a dynamic, interactive map showcasing real-time shopping activities worldwide. The interactive map provides a unique and engaging way for users to explore and connect with the global shopping community during the BFCM event.
On November 8, 2023, WIX introduced a conversational AI chat feature designed to engage users when they initially join WIX to establish their online business. This human-like conversation actively gathers information about the user’s business by asking dynamic questions and providing tailored follow-up questions based on their business intent.
Guy Sopher, Head of AI Assistant at WIX, highlighted the significance of this new AI technology as an effective starting point for users in creating a business profile. Sopher sees this as the initial step toward complete business management automation with AI, offering users a unique and personalized experience to establish a business more efficiently and robustly.
Recent Financial Results
SHOP’s total revenue for the fiscal third quarter (ended September 30, 2023) increased 25.5% year-over-year to $1.71 billion. Its net income amounted to $718 million and $0.55 per share versus a net loss of $159 million and $0.12 per share in the same period last year, respectively.
However, during the same quarter, the company’s cash and cash equivalents and total assets stood at $1.29 billion and $10.46 billion, down 21.9% and 2.7% compared to $1.65 billion and $10.76 billion as of December 31, 2022, respectively.
On the other hand, for the fiscal third quarter, which ended on September 30, 2023, WIX’s revenues increased 13.9% year-over-year to $393.84 million, while its gross profit rose 21.5% from the prior-year quarter to $264.79 million.
The company’s net income came in at $6.98 million and $0.12 per share versus a net loss of $47.36 million and $0.81 per share in the same period last year, respectively. Moreover, as of September 30, 2023, its cash and cash equivalents stood at $504.79 million, up 106.3% compared to $244.69 million as of December 31, 2022.
Past and Expected Financial Performance
SHOP’s revenue has grown at a CAGR of 47.5% over the past five years. Street expects SHOP’s EPS for the fiscal fourth quarter (ended December 2023) to increase significantly year-over-year to $0.30, while its revenue for the same quarter is projected to increase 19.4% year-over-year to $2.07 billion.
Conversely, WIX’s revenue has improved at a 22.1% CAGR over the past five years. Analysts predict WIX’s EPS and revenue for the fourth quarter (ended December 2023) to increase 57% and 13.4% year-over-year to $0.96 and $402.76 million, respectively.
Profitability
WIX’s trailing-12-month asset turnover ratio of 0.81x is higher than SHOP’s 0.61x. Likewise, WIX’s trailing-12-month gross profit margin of 65.95% is higher than SHOP’s 48.88%. Furthermore, WIX’s trailing-12-month levered FCF margin of 8.77% is higher than SHOP’s 5.66%.
Thus, WIX is more profitable.
Valuation
In terms of the forward Price/Sales ratio, SHOP’s 14.93x is 234% higher than WIX’s 4.47x. Likewise, SHOP’s forward EV/Sales ratio of 14.39x is 223.4% higher than WIX’s 4.45x. Additionally, SHOP’s forward Price/Cash Flow ratio of 106.97x is 307.2% higher than WIX’s 26.27x.
Thus, WIX is more affordable.
POWR Ratings
SHOP has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, WIX has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SHOP has a D grade for Stability, justified by its 60-month beta of 2.28. Meanwhile, WIX’s C grade for Stability is in sync with its 60-month beta of 1.36.
Furthermore, SHOP has a C grade for Quality justified by its dimmed profitability metrics. SHOP’s trailing-12-month asset turnover ratio of 0.61x is marginally lower than the 0.62x industry average. However, the stock’s negative trailing-12-month net income margin of 17.27% compares to the industry average of 2.36%.
On the other hand, WIX’s B grade for Quality is consistent with its higher-than-industry profitability. WIX’s trailing-12-month asset turnover ratio of 0.81x is 31.8% higher than the 0.62x industry average. Also, its trailing-12-month cash per share of $8.88 is 361.9% higher than the industry average of $1.92.
Among the 28 stocks in the Internet - Services industry, SHOP is ranked #18, while WIX is ranked #3.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view SHOP ratings. Get all WIX ratings here.
The Winner
As the industry prospects shine amid surging internet users and widespread technological advancements, both SHOP and WIX should benefit. However, WIX’s stronger financial position, higher profitability, and comparatively cheaper valuation could position it as a superior investment compared to SHOP.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Internet - Services industry here.
What To Do Next?
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SHOP shares were trading at $82.87 per share on Friday morning, up $1.57 (+1.93%). Year-to-date, SHOP has gained 6.38%, versus a 0.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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