Shopify (SHOP) and Block (SQ) are two very different companies, but both operate in the e-commerce and payments industries and serve businesses in related ways. Over the past five years, their trajectories have been quite similar – both benefited greatly from pandemic tailwinds, but suffered significant setbacks as those effects faded. Using TipRanks’ Stock Comparison Tool, this article takes a closer look at both companies’ recent developments, including their latest third-quarter earnings reports, which has led to a neutral outlook for Shopify and a bullish outlook for Block, which is the better buy seems to be for now.
Now let’s dive deeper into the comparison and explore the reasons behind my outlook for each company.
Before we delve into the investment thesis for Shopify and Block, it’s important to first highlight their business models and target audiences.
Shopify is primarily an ecommerce platform that allows businesses to create and manage online stores. It offers tools for selling products, processing payments and managing inventory. Its main focus is to help entrepreneurs and businesses of all sizes sell goods online with ease.
Block, on the other hand, is a financial services and payment solutions company. It provides point-of-sale (POS) systems, payment processing and other financial services, primarily aimed at small to medium-sized businesses (SMBs) that need simple, easy-to-use solutions for processing payments.
In terms of how they monetize, Shopify generates revenue through tiered subscription plans, starting at $39 per month, with additional fees for payment processing and extra features. Meanwhile, Block offers a free basic payment processing plan, which charges transaction fees (typically 2.6% + 10 cents for personal payments) and paid services such as payroll and advanced POS features. Additionally, Block has shifted some focus to cryptocurrency, with an emphasis on Bitcoin (BTC USD) and decentralized financial services through the Cash App.
While I remain somewhat skeptical of Shopify for now, contrary to my more optimistic view of Block, it is interesting to note that both companies have shown similar patterns over the past five years, experiencing significant declines due to the pandemic.
This can be attributed to both Shopify and Block (formerly Square) trading at high valuations heading into 2021, fueled by pandemic-induced growth, low interest rates, and the e-commerce and fintech boom. As investors anticipated continued hypergrowth, both stocks saw sharp price increases.
However, after the pandemic, Shopify experienced a slowdown in merchant base growth, raising concerns about its ability to retain customers, especially as competition increased. On the other hand, Block experienced significant volatility in its Bitcoin-related revenue through Cash App, making its revenue more unpredictable and more exposed to market cycles and crypto price fluctuations. These factors contributed to big declines for both stocks, with Shopify down 82% and Block down 85%.
While I have a neutral view of Shopify, this stance is not reflective of the company’s fundamentals. Shopify’s investment thesis is supported by its impressive growth trajectory in recent quarters, particularly its ability to maintain strong revenue growth while expanding profitability margins.
Over the past three years, Shopify’s revenue has grown at a CAGR (compound annual growth rate) of 25% while maintaining gross margins of 51%. Looking ahead, the company is expected to grow earnings per share by as much as 43.6% per year over the next three to five years. My biggest concern, however, is with the valuations. With a price-to-earnings ratio of 88.8x, Shopify trades at a relatively high multiple, resulting in a PEG ratio of 2x, suggesting the stock is somewhat richly valued.
These high valuation multiples reflect Shopify’s strong momentum, further supported by Q3 2024 earnings reported on November 12, which sent Shopify shares up more than 25%. The company posted 26% year-over-year revenue growth, reaching $2.16 billion and marking the sixth consecutive quarter of growth above 25%.
It is remarkable that this growth is not only in turnover, but also in operational efficiency and profitability. A standout performance in the third quarter was Shopify’s ability to deliver strong revenue growth while expanding profit margins, a rare feat among fast-growing tech companies. Operating income rose 132% from $122 million in Q3 2023 to $283 million in Q3 2024, driven by scale rather than cost savings. As a result, operating costs increased by just 7% year over year, while gross profit increased by 24%, demonstrating Shopify’s ability to scale efficiently.
In comparison, Block has shown strong performance similar to Shopify, with its stock price up 52% ​​over the past year. I maintain a slightly more optimistic view of the company, despite its slower growth profile and lower margins (36% gross margin) compared to Shopify. Over the past three years, Block has grown its revenue at a CAGR of 12.5%, which is respectable but not exceptional for a growth stock.
Given this more modest growth trajectory, Block currently trades at a forward price-to-earnings ratio of 24.2x, almost double the industry average. However, the company forecasts robust net growth, with an expected CAGR of 39.9% over the next three to five years, giving Block a PEG ratio of just 0.6x, suggesting the stock is undervalued relative to its growth potential.
While the current momentum for Block is very bullish, the third quarter results reported on November 7 were mixed, with the company meeting expectations but missing revenue expectations despite posting 6% revenue growth. However, investors seemed to focus more on profitability as Block made notable progress in gross profit growth. Total consolidated gross profit was $2.25 billion, reflecting an increase of 19% year over year.
What stood out in Block’s earnings report was strong momentum in the Cash App segment, which saw 21% year-over-year growth in gross profit, outperforming the Square segment, which saw a 16% increase in gross profit yielded. Cash App now represents 58% of Block’s total gross profit, underscoring its critical role in driving the company’s overall growth.
Looking at the Wall Street consensus, Shopify stock is rated as a Moderate Buy, with 11 of 18 analysts bullish, six with a hold rating, and only one assigning a sell recommendation. The average SHOP stock price target of $85.31 suggests downside potential of around 22%, underscoring concerns about the company’s valuations.
View more SHOP analyst ratings
On the other hand, Block Stock is rated as a Strong Buy based on 22 Buy recommendations, four Hold recommendations, and one Sell recommendation. SQ’s average price target is $89.50, implying 7.3% upside potential.
See more SQ analyst ratings
While both Shopify and Block have had standout performances this year, with strong progress in recent quarters, especially in the third quarter, Block appears to be the better investment right now.
Shopify offers greater growth potential and stronger margins, but this comes at a much higher valuation, which I believe is justified by its premium growth prospects. Block, on the other hand, has a more modest growth trajectory but is steadily moving toward profitability, largely driven by momentum in its Cash App business. Additionally, Block is trading at valuations that appear undervalued relative to its strong EPS growth forecasts, making it a less risky investment in my opinion.
