Markets

This Is the One Reason I Own Shopify but Not Amazon

For over a decade now, the retail world has been changing rapidly. Selling on the internet, championed by Amazon (NASDAQ: AMZN), has been the undoing of many retailers. That trend has only been exacerbated in recent months. A redundancy crisis has taken shape due to the lockdowns intended to halt the spread of COVID-19, leaving many companies that were slow to adapt out to dry.

Yet internet-based business also presents massive opportunities -- for investors and also for society overall. And with a huge wave of unemployment and deep social inequality needing to be dealt with, remote work, small business, and entrepreneurship might be key ways to break down these problems and help ignite a real recovery. It's the one reason why I own shares of Shopify (NYSE: SHOP) and not Amazon.

A laptop, smartphone, and cup of coffee sitting on a table in front of a window.

Image source: Getty Images.

A back-office partner, not a potential competitor

Amazon's storied journey is undeniably impressive, and its growth is far from over. But one of the ingredients of the tech giant's success has been its ability to learn about various industries -- often via its own customers, who make use of both its retail marketplace and cloud computing platform AWS -- and then introducing its own offering to take over the market.  

Such a business model is great for innovation, and it has helped build one of the most valuable companies on the planet (not to mention that it's created the richest person on the planet too). But that model of disruption doesn't always equate to better opportunity for the average person. Shopify, on the other hand, has had the mission from the get-go to put the power of the internet and internet-based retailing back in the hands of small businesses. 

It's a noble cause that may be slightly diluted by the fact that Shopify itself is now a massive enterprise quickly closing in on $1 billion in quarterly revenue (after second-quarter revenue increased 97% year over year to $714 million). It's not exclusively a small company tool, as Shopify Plus focuses on helping large brands sell online too. And not everyone is destined to be self-employed, so job creation is still important. Yet the key difference here is that Shopify does not compete with its customers. That matters as the company's success is directly tied to the success of those that pay for its services. It also matters for the health of the economy overall.  

A creator of opportunity, not jobs

Some key numbers from the company's second quarter stand out in this argument. Gross merchandise volume -- the value of all goods sold on the company's platform -- surged 119% year over year to more than $30 billion. That's still less than 6% of overall e-commerce market share, so there's still work to be done to bolster small operators online. But even more striking to me was the 71% increase in new online stores created compared with the first quarter of 2020.  

This figure needs some further interpretation. Benefiting the fast migration to Shopify was that it extended its free trial from 14 days to 90 days, an offer that has since expired. Shopify also said that conversion rates from free trial users to paying users are "slightly lower" than prior to the pandemic. Many of these new stores also represent established businesses that were suddenly in need of updating their operations to survive the sudden shutdown of the economy. It's unknown how many of these businesses are actually new start-ups. Nevertheless, the company revealed last autumn that it surpassed one million merchants worldwide making use of its platform. There's a lot of room for growth as many people are turning to self-employment in light of recent events.

Job creation at big employers is important. But if I had to choose just one, I'm a bigger fan of seeing newly created successful entrepreneurs and small businesses. Lots of smaller successes even the playing field for everyone. It creates consumer choice. And it creates a template for other aspiring business owners with an idea and desire to create something for themselves as well.

I'm not saying the company is free of issues, and as its success continues, Shopify will draw critics. From an investment standpoint, I'm also not saying buying the stock is for the faint of heart. Its nosebleed-level valuation is only partially supported by the stellar quarter it just had -- although those investors who want in on the company for the long term (no less than a few years or more) shouldn't fret too much about current valuation. Just be prepared for a very wild ride.

However, Shopify's championing of entrepreneurship and democratization of retail has always resonated with me much more. Without a doubt, Amazon's disruption of the status quo has helped pave the way for this movement. But I think Shopify's mission -- along with that of peers like Etsy (a marketplace for craftspeople) and Wix.com (bloggers, professional services, restaurants, and retailers) -- will be an incredibly important one in the years ahead post-pandemic.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo owns shares of Etsy, Shopify, and Wix.com. The Motley Fool owns shares of and recommends Amazon, Etsy, Shopify, and Wix.com and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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