E-commerce is a compelling industry to invest in because it still has plenty of room for growth. According to an estimate from Statista Market Insights, the global e-commerce market will expand from 2023’s $3.6 trillion to a whopping $6.5 trillion by 2029.
Amazon (AMZN -0.89%) and Shopify (SHOP -1.22%) are taking different approaches in their ongoing efforts to capture their share of that growth. The former largely sells directly to consumers, while the latter helps other businesses sell their wares online by providing them with the technical infrastructure they need.
Both posted stellar third-quarter results that propelled their share prices higher in November. But which one is the better stock to buy right now?
Reasons to invest in Amazon
Amazon is the undisputed king of domestic e-commerce with a 38% market share in the U.S. last year. Its closest competitor had a 6% share. But internationally, it hasn’t always been as successful. In Q3 2023, its international segment suffered an operating loss of $95 million. It turned that around in 2024 as Q3 international operating income reached $1.3 billion. This helped Amazon grow overall operating income by 56% year over year to $17.4 billion.
Amazon is also working to grow its free cash flow (FCF), which provides it with the capacity to invest in its business, pay down debt, and repurchase shares. The firm’s FCF over the past four reported quarters rose by 123% year over year to $47.7 billion. That’s particularly impressive considering that Amazon’s trailing-12-month FCF was negative $19.7 billion just two years ago.
The company’s consolidated Q3 revenue rose by 11% to $158.9 billion, which helped it achieve strong results on both FCF and operating income. Innovations such as the introduction of an AI shopping assistant and AI-powered shopping guides galvanized its retail sales.
AI tools for its third-party sellers also added to Amazon’s revenue growth. These sellers contributed $37.9 billion of Amazon’s $158.9 billion in Q3 sales.
A look at Shopify
Shopify isn’t a retailer in its own right like Amazon. Instead, it provides e-commerce technology to other businesses. It generates revenue from the subscription fees they pay for access to its software platform, as well as from fees collected for various services it provides, such as online payment processing and currency conversion charges.
That non-subscription income is reported under the umbrella of Shopify’s merchant solutions segment. Merchant solutions generated 72% of the company’s $2.2 billion in third-quarter revenue. Because this income is critical to the company, the volume of seller sales processed through Shopify’s software — i.e., its gross merchandise volume — is an important metric for it.
In Q3, gross merchandise volume rose 24% year over year to $69.7 billion as Shopify’s sellers’ sales increased and the company attracted more merchants to its platform. As a result, its revenue rose 26% year over year.
Shopify’s ability to retain sellers and bring in new ones is one of its core strengths. Existing merchants using its platform have been able to increase their sales over time, which has more than offset the loss of any sellers leaving the platform. For example, merchants who joined Shopify in 2020 saw their sales grow nearly 100% by 2023.
Sellers stay with Shopify because the company strives to make its platform easy to use. This year, the company introduced AI to help merchants respond to customer inquiries, and is implementing a feature to allow automatic tax filing through the Shopify platform.
Deciding between Amazon and Shopify
There are valid arguments for investing in either of these companies. Shopify’s 26% year-over-year Q3 revenue increase was faster than Amazon’s 11% growth. That said, Amazon is a much larger business, diversified across retail, cloud computing, consumer technology, and even satellite-powered broadband service.
Their respective price-to-earnings ratios (P/E ratio) may offer some insight into which is the better stock to buy now. This metric assesses the value of a stock by telling you how much investors are willing to pay for every dollar the company earns.
Data by YCharts.
Shopify’s stellar results in Q3 beat Wall Street estimates, leading to a surge in its stock price that elevated its P/E multiple to over 100. Amazon’s is substantially lower, suggesting it’s a better value. Considering Amazon’s strengthening financials, especially around operating income and free cash flow, its vast business, and lower P/E multiple, Amazon is the better investment choice over Shopify at this time.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Amazon and Shopify. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.
