Summary
- Amazon is the undisputed leader in e-commerce. It has astutely added a considerable amount of fulfillment footprint over the last two years.
- Shopify reported decent FQ4 results, but its strategic revamp of its asset-light" fulfillment strategy "terrified" investors.
- We discuss why AMZN stock is the better Buy Now.
Investment Thesis
Amazon $Amazon.com(AMZN)$ and Shopify Inc.$Shopify(SHOP)$ are both the leading e-commerce stocks in the US by gross merchandise value (GMV). Nonetheless, Amazon is the undisputed leader with a 41% share of the US retail e-commerce GMV. Shopify follows in second place, accounting for 10.3%. Both stocks also rode the pandemic tailwinds underpinning their e-commerce businesses. However, the pull-forward growth and normalization in GMV growth have also hit both companies.
However, we believe the strength in Amazon's AWS cloud computing business and its burgeoning retail media advertising segment separates their fundamental thesis. We have emphasized before that investors must closely watch these two segments.We stressed that Amazon had decomposed its advertising revenue for the first time. We believe that it heralded the company's ambitions to compete aggressively against the leading US digital ad incumbents.
However, Shopify$Shopify(SHOP)$ doesn't have the luxury of a highly profitable and cash flow accretive AWS segment in their business. Nor does Shopify have an advertising business of Amazon's scale. Nevertheless, it has proven its execution with its asset-light approach over time. However, its new strategic roadmap of investing aggressively in its fulfillment network opens up potential execution risks that were previously unexpected. Investors were understandably concerned that the company lacks a highly profitable cloud computing and advertising business like Amazon. Therefore, the stock was justifiably punished.
Will Shopify and Amazon Continue to Grow?
Both companies are expected to continue growing their topline robustly, with Shopify estimated to grow faster. Therefore, even though Shopify will aggressively expand its fulfillment network, the Street is still confident that it can grow rapidly. Nonetheless, it also marks a significant slowdown with its 30%+ topline acceleration estimate moving forward.
We highlighted in our recent Amazon article that the supply chain headwinds and inflation had buffeted the company's retail business. We can also observe Amazon's rapidly declining GMV growth over the past year. Therefore, the normalization in e-commerce's growth has undoubtedly affected its retail business. Not only has it slowed down its retail engine, but both its North America and International segments' operating margins also turned negative.
Therefore, it could have been worse for Amazon if it wasn't for the strength in its AWS and advertising segment. We can glean from the above that AWS has continued to thrive, as the cloud computing IaaS market grew 36% last year. Therefore, as the #1 hyperscaler in the market, AWS is expected to continue its leadership, despite facing more intense competition from Microsoft Azure$Microsoft(MSFT)$ and Google Cloud. In addition, AWS's operating margins have remained resilient, demonstrating its pricing leadership. Therefore, we believe that Amazon can continue to rely on AWS to drive its topline and profitability while leveraging its expanded retail scale.
Can Shopify Overtake Amazon's Fulfillment Network?
Shopify telegraphed an ambitious plan to build a fulfillment infrastructure capable of enabling a 2-day delivery network. It's a clear departure from its previous "asset-light" approach. That approach has also allowed the company to gain operating leverage, as seen above. So, Shopify has undoubtedly executed well. However, its ambitious plan to develop its 2-day network has left investors concerned with its execution risk. It's certainly no mean feat to try and replicate Amazon's success. Fulfillment has been Amazon's forte. Shopify President emphasized (edited):
We are shifting the network model really to larger capacity hubs, and we want to operate more of them ourselves to things like better control quality, but also on cost here. As part of this, we're also unifying the network across -- with the warehouse management system. And so we think that will also continue to optimize things. But the goal here is clear. We expect to enable 2-day delivery coverage to more than 90% of the U.S. population. And at the same time, we want to obviously minimize inventory investment for us if needed. We talked about the additional spending. We expect spending to be about $2B through 2024, including $1.4 billion in CapEx. (Shopify's FQ4'21 earnings call)
It's an aggressive plan indeed. Coupled with its emphasis on reinvesting all its "gross profit dollars," this is certainly Shopify's most aggressive CapEx expansion that it has undertaken.
But can it even catch up with Amazon? Loop Capital also weighed in on Shopify's ambitions (edited): "The extent of the management's planned 2022 investments was 'surprising' and imply that Shopify's profit margins will be "far below" our expectations. Also, Shopify Fulfillment Network's two-day delivery goal seems 'antiquated at best' given the fact Amazon is rapidly transitioning to one day."
Source:seekingalpha
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