ContextLogic vs. Shopify: Which E-Commerce Stock is a Better Buy?

The e-commerce industry skyrocketed in 2020, due to the coronavirus, as people increased purchasing goods and services online, rather than leaving their homes and risk infection.  With the rising concerns regarding the omicron variant of COVID-19, the e-commerce industry could experience another similar surge.

Even without a surge, according to ReportLinker, the global e-commerce market is expected to grow by $10.87 trillion, demonstrating a CAGR of 29% between 2021 and 2025. This solid growth rate is expected to be fueled by the higher volume of social media advertising as well as an increase in the dynamic product portfolios. 

With this in mind, today I’m going to analyze and compare two major players in the e-commerce market: ContextLogic Inc. (WISH) and Shopify Inc. (SHOP). Founded in 2010, WISH is a California-based e-commerce company that connects users to merchants through its solution, known as Wish platform. It also offers marketplace and logistics services to merchants. Year-to-Date (YTD), WISH stock has lost about 78%.  Based in Ottawa, Canada, SHOP offers a cloud-based commerce platform to merchants, allowing them to run their business in various sales channels.  Year-to-Date (YTD), shares of SHOP have advanced about 38%. 

Recent Developments

On November 4th, Klarna partnered up with ContextLogic to deliver “Buy Now, Pay Later” options to U.S. shoppers. Under the terms of the partnership, WISH customers in the U.S. will be able to divide the cost of their purchase by four payments through Klarna’s app. Both companies plan to expand their deal in 2020, launching the BNPL options in Europe as well. 

On November 27th, Shopify reported record Black Friday sales of about $2.9 billion for merchants. This figure represents a 21% growth compared to Black Friday sales in 2020. In addition, the average card price stood at $101.20 versus $90.70 a year ago. 

Financial Overview 

For its fiscal third quarter ended September 30th, 2021, ContextLogic revenue decreased 39.3% year-over-year to $368 million, missing Wall Street expectations by $5.89 million. The decrease in revenue was mainly driven by lower marketplace and logistics revenue.

In addition, the company’s Monthly Active Users (MAUs) dropped by about 40% to 60 million in Q3 amid substantially lower digital advertising expenditures, compared to 100 million MAUs in a year-ago quarter. 

However, WISH reported an Adjusted EBITDA loss of $30 million versus $64 million as of 3Q2020. As a result, the company’s GAAP EPS has been reported at ($0.10), topping the consensus by $0.05. 

For the next quarter, analysts see WISH’s EPS at ($0.09). Also, a $317.63 million average revenue estimate for the fourth quarter of 2021 indicates a 60% decline on a year-over-year basis. 

When it comes to Shopify, the company’s total revenue for its fiscal third quarter has risen 45.9% YoY to $1.12 billion. However, the company failed to meet highly optimistic Wall Street expectations, missing consensus by $30 million. Besides, SHOP reported a Non-GAAP EPS of $0.81, missing analysts estimates by $0.41.

The company's revenue from the Merchant Solutions segment, which accounted for 70% of total revenue in Q3, increased 51% year-over-year to $787.5 million. This growth was driven primarily by the 35% increase in Gross Merchandise Volume during the quarter. Besides, its Subscription Solutions segment showed a 37% YoY revenue growth to $336.2 million. 

For the fourth quarter, analysts expect SHOP’s EPS growth to slow down by about 12% to $1.39. However, its top line should advance 37.88% to $1.35 billion in Q4.

Valuation 

In terms of forward EV/Sales, SHOP is currently trading at 41.79x, which is significantly higher than WISH’s 0.63x. When it comes to forward P/S also,  SHOP’s 42.93x is 3,577.5% higher than WISH's 1.20x.

Despite relatively a high valuation, SHOP has a better margins profile with an EBITDA margin TTM of 12.27% and net income margin TTM of 81.00%, exceeding WISH’s negative figures.

The Bottom Line

Putting it all together, I believe that SHOP, at current levels, is a better long-term buy candidate. The company looks attractive based on better fundamentals and future growth standpoint. Although SHOP currently trades with rich valuations, its solid growth rates make this premium worth paying.

WISH shares were trading at $3.64 per share on Tuesday afternoon, down $0.32 (-8.08%). Year-to-date, WISH has declined -80.04%, versus a 23.41% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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