WIX - Shopify Vs. Wix: Whose Common Shares Should You Check Out?

2023-04-29 02:49:46 ET

Summary

• Shopify and Wix are currently battling for eCommerce market share as more retail sales are conducted online. Shopify occupies a dominant position.
• Profitability for both businesses is mixed. Wix has higher gross profit margins but Shopify's levered FCF margin is slightly ahead.
• Shopify notched fiscal 2022 fourth-quarter growth that was nearly 2,000 basis points higher than Wix.
• This has rendered the more content-oriented Wix to trade on a price-to-sales multiple of 3.6x versus Shopify's 10.76x multiple.

Should you go with Shopify ( SHOP ) or Wix ( WIX ) in the battle for eCommerce dominance? Both companies offer entrepreneurs a platform to build an online store, take payments, and manage email marketing and shipping to realize ambitions to sell into a global market. Ottawa, Ontario-based Shopify is admittedly the more extensive platform for facilitating online sales. It boasts a range of third-party eCommerce tools that allow a deeper relationship and a more bespoke customer experience to be curated by the businesses onboarded to its platform.

Tel Aviv, Israel-based Wix primarily offers tools to build content sites with eCommerce essentially offered as a secondary almost side offering. Essentially if you want to create a blog, brochure site, or showcase your portfolio, then you go with Wix. For entrepreneurs, the $67.4 billion market cap Shopify likely offers a better more eCommerce native platform. Picking the right online store builder is crucial as it's the backbone of operations and a core factor for scaling.

However, whilst there are at least 8.5 million websites powered by $4.6 billion market cap Wix versus 4.2 million websites powered by Shopify, the leadership difference in eCommerce for both is marked. eCommerce usage distribution in the top 1 million sites gives Shopify a 21% market share with Shopify Plus at 5%, both ahead of Wix Stores at 3%. Both are down markedly over the last year as a comedown from pandemic-induced revenue highs and rising Fed funds rate aggregated to compress valuation multiples.

Valuation Divergence, Revenue, And Profitability

Take a time machine back to 2020 and Shopify was trading at 60x sales with Wix trading at 20x sales. These highs are firmly in the rearview but expose just how deep stock market euphoria was for eCommerce plays as stay-at-home orders kept their brick-and-mortar competitors shut. Shopify currently trades on a price-to-sales multiple of 10.76x versus Wix's 3.6x multiple to reflect more buoyant investor euphoria for eCommerce over Wix's content-based website tilt. Whilst their previous sales multiples were always going to be unsustainable, both are currently trading at marked discounts to their 5-year averages.

Wix is trading at a 60.8% discount to its 5-year average multiple of 9.26x with Shopify trading at a similar 63.4% discount to its 5-year average multiple of 29.42x. Bears would be right to flag that both these are skewed by the boisterous pandemic years and that future sales momentum will be slower. Shopify's fiscal 2022 fourth-quarter earnings brought in revenue of $1.73 billion , a 25.4% increase from the year-ago comp and a beat by $80 million on consensus estimates. GMV was $61 billion for the fourth quarter, up 13% from its year-ago comp, this was around 17% growth on a constant currency basis. Monthly recurring revenue recorded slower growth, up by 7% year-over-year to $109.5 million but still ahead of a consensus of $106.1 million.

Wix recorded fiscal 2022 fourth-quarter revenue of $355 million , up 6% over the year-ago quarter, around 8% growth on a constant currency basis. This was also a beat by $3.12 million on consensus estimates. Creative subscription revenue was $265.3 million, up 8% over the year-ago comp and around 100 basis points ahead of Shopify's core recurring subscription revenue growth. Critically, Wix's gross profit margins are ahead of Shopify's on the back of its higher margin recurring revenue forming a larger percentage of total revenue.

Gross profit margin for Wix came in at 63.7% for the fourth quarter, ahead of Shopify's 46% margin. However, both companies have been experiencing margin compression over the last three years, albeit with Wix stabilizing its decline as Shopify's margin continues to move lower. Slower subscription revenue growth and a higher dependence on its GMV take for revenue have weighed down on Shopify's overall profitability. Shopify would record a net loss of $623.7 million, around 36% of revenue, during its fourth quarter due to the impact of one-time items. However, the company actually delivered cash flow from operations of $97 million during the quarter. Wix recorded a net loss of $39 million, around 11% of revenue, with cash flow from operations positive at $53.2 million .

The Near-Term Outlook

That Wix recorded operating cash flows that were 55% of Shopify's despite the market cap and revenue gap between both is a strong reflection of its more subscription-oriented charging model. Hence, whilst Shopify dominates the eCommerce space, Wix has built a strong position in its niche, one that includes eCommerce capabilities and is intrinsically more profitable on a gross profit margin basis.

The promise of a global economy experiencing a generational structural shift away from brick-and-mortar retailing to the internet has made Shopify the better story stock here, a factor that has likely historically made the strongest impact on its valuation multiple. Indeed, the mainstream onset of internet commerce following the new millennia has seen eCommerce as a percentage of total retail sales continually grow. It sat at 15% in 2021 but is forecasted to surpass its pandemic highs by the end of the decade.

Shopify perhaps represents one of the best publicly listed ways to play this secular shift. Hence, even with its growth slowed materially from its pandemic averages, it still manages to trade at a double-digit sales multiple. The company represents a low-hanging fruit for investors looking to build portfolio exposure to the eCommerce macro trend. Which should you go with? Wix is rated a D+ for profitability as is overall levered FCF margin for the last 12 months at 3.83% is 43% lower than its sector median.

Shopify is also rated a D+ with a levered FCF margin of 4.1%, around 39% lower than its sector median. Shopify likely represents the better choice if you're less concerned with gross profit margin profitability and want exposure to the dominant online shop builder. Whilst revenue growth has slowed, its overall growth rate is still markedly ahead of Wix.

Wix likely represents the better choice for more value-orientated investors with its lower multiple against its peers presenting a possible avenue for possible positive returns on a return to its 5-year mean. I hold a small position in SHOP stock but I might look to take a position in WIX stock before the summer.

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