Wix vs. Shopify
Not all No-Code Business Builders are Created Equal
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One of my favorite things about Twitter is the idea generation - not just for dumb memes or for this newsletter, but for better understanding the financial world around us. Recently, I saw a tweet that discussed the disparity in valuations between Wix and Shopify and it got me thinking about the two no-code Goliaths.
I have written in the past about the power of no-code tools, and Wix is one of the OG’s - an extremely simple to use website builder that has been around back before no-code had the halo effect it currently occupies. But Shopify is probably one of the first companies that everyone thinks of when someone says “no-code” - especially during the ongoing COVID-19 Crisis, where the ability of a store to go online has been more crucial than ever. It’s no surprise that during the past month and a half, when software stocks skyrocketed, that these two reaped some of the rewards.
SHOP (up 161% as of 7/9/20):
WIX (up 142% YTD as of 7/9/20):
Although they are both keeping pace with each other, the fact stands that SHOP is worth nearly 10x more than Wix. Certainly, if you are paying attention to the enterprise software discourse, this would make sense - Shopify has been chewing up market share because of it’s extremely easy-to-use product, it’s growing like bananas, and there is a general increased demand for ecommerce platforms (arm the rebels, etc.). And, while Wix has had a shopping feature for a while, it certainly didn’t seem to be tearing up the market the way Shopify has been.
But still, Wix has grown pretty significantly over the past several quarters and years (see below). Although a 26% annual growth rate is not what a Series A venture capitalist is looking for, it’s not too shabby for a public company that earned $761 million in 2019. The Company is, however, losing money at a pretty impressive clip too. And it’s not like all of that top-line cash flow is being poured into R&D, à la Amazon, Netflix, or some other big tech public company. However, it’s not like they aren’t reinvesting the product either - approximately 1/3rd of all revenue is going into R&D, while 40% of it is going into Selling & Marketing. And while the net income margin is improving year-over-year, the company is still financing it’s losses the hard way - through debt. The Company’s balance sheet is jacked somewhat weighed down by a financing event they took on on in 2018, significantly impacting its debt position.
In comparison, there is Shopify, which has a higher growth rate, more revenue, and is losing money at a relatively similar rate to Wix. Shopify is a slightly younger company (Wix went public in 2013) and does seem to have a larger head of steam. Shopify spends more overall, but less as a percentage of revenue on R&D, and its sales & marketing expenses are not nearly as burdensome as Wix’s.
If you had to break down these two businesses into their simplest elements, like I tried to do in at the start of this newsletter, you would probably come to the conclusion that they are pretty similar in nature as far as business model is concerned. And when you look at them financially, it’s somewhat easier to tell that, while Shopify is probably worth more than Wix (at least, at first glance), they are pretty good comps.
That is, until you look at their trading multiples. Shopify has a market cap of $123 billion and Wix has a market cap of $15.4 billion. Shopify’s revenue multiple is ~70x, while Wix’s is about 20x! 20x revenue is pretty dang good, especially for a company with low margins that hasn’t made a profit in years, but compared to Shopify, that’s chump change.
So I don’t bring all of this up because I am trying to make an investment pitch of one of these companies or the other. I am not a professional public markets investor (nor do I want to be), and I don’t want to give anybody stock advice. But I do think this is a pretty powerful lesson in understanding what’s going on in the enterprise software market today, even on the startup level.
We have talked a lot about the financials behind these companies, but not a lot about their business models or growth stories. While I don’t really have the bandwidth or free time to parse these two companies’ models and stories, it’s safe to say that the Shopify story is being told much better these days.
What goes into a story for a company like this? Probably that the tailwinds it is facing are favorable, the management team is super strong, and the product generates a halo effect for the company’s future. [I will be the first to tell you that as a user of Shopify, the product is super slick - I would recommend it.] A equity research analyst who covers both of these names could probably give you much more in depth understanding of their respective stories and why one is trading at a premium to the other.
And I am not saying that like it’s a bad thing - sometimes the story of a company can tell you more than it’s financials. But it is important to recognize that the stories that are told about a company when they are private don’t just go away when they are public. So if you are a founder, or work at a startup, make sure you nail that story early and often, because it can make a big difference in the long run.
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