Shopify Should Not Have a Larger Market Cap Than Square

Stocks to buy

When it comes to choosing between Shopify (NYSE:SHOP) and Square (NYSE:SQ), if you can afford to own both SHOP stock and SQ stock, you should do so.

Square Stock May Be Due for a Cooling Off Period

Source: Jonathan Weiss / Shutterstock.com

However, it blows my mind that Shopify has a market capitalization of $183 billion, while Square’s is only $106 billion.

Here’s why I feel that way.

Square Is More Disruptive

Shopify is three years older than Square. Tobi Lutke, Daniel Weinand, and Scott Lake co-founded the e-commerce platform in 2006. Square got its start three years later in 2009 when Jack Dorsey teamed up with Jim McKelvey to make a credit card reader that transmits data via a smartphone headphone jack.

Maybe because I don’t run an online e-commerce site, when it comes to real-life contributions, I see Square’s invention as far more game-changing than Shopify’s creation of an e-commerce platform. 

It’s true that Shopify has become the weapon of choice for companies big and small. For a reasonable subscription price, larger brands can use Shopify Plus for $2,000 per month or more, depending on their requirements. That’s dirt cheap. 

In the U.S. e-commerce arena, Shopify has 8.6% of the market. It’s in the second spot, well behind Amazon (NASDAQ:AMZN), whose share is 39%. The odds of Shopify catching Amazon are much lower than Walmart (NYSE:WMT) or somebody else passing Shopify. 

Meanwhile, Deutsche Bank analyst Bryan Keane has followed the progress of Square over the last five years. As a result, he’s now convinced that it’s the real deal. He currently rates SQ stock as a “buy” with a target price of $330, versus yesterday’s closing price of $233.69.

“We believe SQ remains well positioned to benefit from the accelerated adoption of digital financial services, software-based business solutions, and omni-channel capabilities spurred by the COVID pandemic,” Keane told CNBC in June.

“Cash App continues to significantly outperform as SQ has been able to attract new customers and engage existing customers while simultaneously improving monetization and product adoption,” the analyst added.

From where I sit, the company’s Cash App ranks right up with some of the greatest innovations in the financial services industry. 

And, yet, Square is valued at 8.9 times sales, one-sixth the multiple of Shopify. Heck, PayPal (NASDAQ:PYPL), which has been around since 1998, has a price-sales ratio of 15.3 times or almost double that of Square. 

There is no question that investors aren’t giving Square its due. 

The True Value of SQ Stock

I’ve read a lot online about investors getting impatient with Jack Dorsey’s plan for Square outside the U.S. Why hasn’t it entered Latin America, Europe, and every other market on the planet?, some are asking. 

The simple answer is that he probably wants to focus on planting his Cash App flag in the U.S. 

The Motley Fool’s Neil Rozenbaum, a Square shareholder, is one of those impatient investors. He recently complained because Square only made $310 million on Caviar over the five years that it owned the food delivery service. 

I only wish that my biggest mistakes delivered 33% compound annual growth. But I digress. 

So let’s consider Square’s current strengths. 

First, it has delivered three consecutive quarters of GAAP profits. In the first quarter,  its net income came in at $39 million. The company’s operating income was $67.7 million, significantly higher than its operating loss of $90.3 million during the same period a year earlier.

As far as gross profit, it generated $964 million last quarter, 79% higher than in Q1 of  2020 and 19.9% higher than in Q4 of 2020. Last quarter, Square’s gross margin was 62.2%. up from 50.1% during the same period a year earlier.  Thus, its efforts to become profitable continue to gain momentum.   

In the 12 months that ended in March, Square had an operating profit of $160 million on $13.17 billion of revenue. During the same period, Shopify had an operating profit of $280 million on $3.45 billion of revenue. Square’s operating margin of 1.2% was considerably lower than Shopify’s, which was 8.1%. However, excluding Bitcoin, Square’s operating margin was 2.6%. 

The Bottom Line

There is so much to like about both stocks and the companies’ business models. 

And while Shopify is more profitable, I’m still having difficulty accepting that its valuation is so much higher than Square’s. That’s especially true since Square’s Cash App continues to be very popular and highly profitable. 

Over the long-term, they will both be great stocks.  If I could only own one of them, however, SQ stock would be my choice.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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