Shopify vs. Etsy: Which Online Retail Stock Should You Buy?

Interested in investing in online retail stocks? First thing's first - Shopify or Etsy?
By William Craig ,

It's no surprise that online retail continues to rise in popularity as traditional brick-and-mortar stores slow down. The writing has been on the wall for years now, but timing investments to take advantage of this trend is difficult. The growth of online retail is steady rather than a quick burn, and the market is becoming crowded with not just traditional retailers making a push online, but young upstarts trying to corner different parts of the market.

Online retail and ecommerce are ripe for continued growth because there is still so much market share available. Right now, ecommerce has a seven percent market share. That's not insignificant, and Forrester Research predicts the total market share to rise to nine percent in 2016.

Most promising, however, is how people are doing their shopping online. Back in 2001, Forrest Research found that customers weren't accustomed to buying a variety of products online. At the time, only three of 30 retail categories had 20 percent of all sales being conducted online. In 2016, 14 retail categories will see 20 percent of their products sold online.

Players in the Industry

There are going to be some winners and losers as the battle for online retail shapes up. Here's a look at two of the bigger players in the industry and how their fortunes are heading in opposite directions.

ETSY

data by

YCharts

Etsy, Inc. (ETSY) - Get Report

To call Etsy an underperformer would be polite. The Brooklyn-based artisanal crafts marketplace went public in April 2015 and has since seen its stock lose 70% of its value due to disappointing earnings.

Revenue in the third quarter was up 38% from the previous year, but still fell short of expectations. The company blames currency exchange rates as part of the reason for the missed earnings, but the truth is that the marketplace is becoming increasingly crowded.

What's troubling for Etsy investors is Amazon's push into the market with its "Handmade" platform that recently launched. The online behemoth is targeting the exact same people who buy and sell on Etsy. It's too early to tell what kind of impact Amazon will have on Etsy, but what's certain is that there will be an affect.

In some ways, the company is a victim of its own success. The idea of letting artists and other creative types sell their wares online in their own marketplaces on Etsy is still hugely popular with both buyers and sellers. Yet one of the problems plaguing the company is that the brand is being devalued by a glut of fake goods. So-called artisanal products are being sold for a premium when they're really just cheap, mass-produced products. On top of that, there are a number of unlicensed items on the Web site with questionable legal standing.

Maybe Etsy can turn things around and be a value buy, but at the moment, it seems unlikely for the young company.

SHOP

data by

YCharts

Shopify (SHOP) - Get Report

Shopify went public a month after Etsy in May 2015, and it's faring a lot better. Shopify provides e-commerce software to retailers selling online. Beyond simply providing a way for payments to be made, Shopify can also track inventory, customer interactions and other important metrics.

Their services have proven to be a hit, with 200,000 businesses worldwide paying transaction fees and subscription fees to use the Shopify platform. The most recent earnings crushed expectations, with 52.8 million in third-quarter revenues and a 93% improvement from the previous year. Part of that success is because of how Shopify has aligned itself with big online brands such as Facebook, Twitter and Pinterest to power payments on those Web sites.

In the competitive field of e-commerce, Shopify is fast solidifying itself in the industry and still has lots of room to grow.

Looking Forward

Not all companies are going to make it as the economy slowly transitions to more sales being conducted online. What is for certain is that the future is bright for companies doing online right. More than half the U.S. population is shopping online, with more new customers each year. These people are also spending more than ever, with $1,207 per consumer being spent in 2011 compared to a projected $1,738 in 2016 according to Forrester Research.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...