Home-office hybrid work environments, virtual communication, learning, gaming, shopping, and managing finances have resulted in an increase in internet users worldwide. Amid this, let’s evaluate the prospects of two internet service companies.
Shutterstock, Inc. (SSTK) is a technology company that provides quality content and creative workflow solutions internationally. Headquartered in Ottawa, Canada, commerce company Shopify Inc. (SHOP) provides a commerce platform and services in Canada, the United States, Europe, the Middle East, Africa, the Asia Pacific, and Latin America.
Digital transformation of several industry verticals requires internet services, which consequently aids the economic growth of a nation. Internet usage has been gaining prominence owing to its significance in a fast-paced globalized world.
As per Statista, as of April 2023, the global internet penetration rate was 64.6%. Out of the 5.18 billion people globally connected to the world wide web, 311.3 million people in the United States are using the internet.
Furthermore, the global internet service market was valued at $498.62 billion in 2022 and is forecasted to reach $644.87 billion by 2029, witnessing a CAGR of 4.4% between 2023 and 2029. This could bode well for the featured stocks.
Over the past year, SSTK has lost 18.2%, whereas SHOP returned 69.4%. Over the past month, SSTK has lost 5.6%, and SHOP has lost 3.4%. However, over the past five days, SSTK has gained 3.2% to close its last trading session at $48.72, while SHOP returned 2.6% to close its last trading session at $59.92.
But which stock is a better buy now? Let’s find out.
Latest Developments
On May 23, SSTK announced its agreement to acquire GIPHY, Inc. from Meta Platforms, Inc. (META). Thus, gaining access to the world’s largest GIF library and search engine. This move allows SSTK to expand beyond professional marketing and advertising, reaching a wider audience. The acquisition might boost the company’s profitability and growth.
On May 3, 2023, SHOP entered into a definitive agreement to sell the majority of its logistics business to Flexport, which is a leading tech-driven global logistics platform.
Under the terms of the agreement, SHOP will receive stock representing a 13% equity interest in Flexport on top of its existing equity interest. This transaction is expected to close in the second quarter of 2023.
Recent Financial Results
For the fiscal first quarter that ended March 31, 2023, SSTK’s revenue and adjusted EBITDA grew 8.1% and 27.3% year-over-year to $215.28 million and $69.76 million, respectively.
Moreover, the company’s adjusted net income rose 26.8% from the year-ago value to $47.13 million, while its adjusted net income per share grew 29% year-over-year to $1.29.
Even though SHOP’s revenue and adjusted gross profit increased 25.2% and 14.2% year-over-year to $1.51 billion and $738 billion, respectively, for the fiscal first quarter that ended March 31, 2023, the company’s adjusted operating loss stood at $31 million, compared to the adjusted operating income of $32 million in the year-ago quarter.
Moreover, SHOP’s adjusted net income and adjusted net income attributable to shareholders declined 52% and 50% year-over-year to $12 million and $0.01, respectively, during the same quarter.
Past and Expected Financial Performance
SSTK’s revenue has grown at a 1.2% CAGR over the past three years, and SHOP’s revenue grew 7% CAGRs over the past three years. Also, SSTK’s total assets grew at 6.8% CAGR over the past five years, while SHOP’s grew at 43.8% CAGR over the same period.
SSTK’s EPS for the fiscal year ending December 2023 and December 2024 is expected to increase 5.5% and 5.4% year-over-year to $4.08 and $4.30. respectively. Its revenue for the same period is expected to increase 2.8% and 5.7% year-over-year to $851.28 million and $900.18 million, respectively.
Its revenue and EPS for the quarter ending June 2023 are expected to increase 16.9% and 4.1% year-over-year to $215.31 million and $0.97, respectively.
For fiscal 2024, SHOP’s revenue and EPS are expected to increase 18.1% and 64.2% year-over-year to $7.95 billion and $0.51, respectively. Its EPS for the fiscal second quarter ending June 2023 is expected to come in at $0.05, whereas its revenue is expected to come in at $1.62 billion.
Profitability
SSTK has a trailing-12-month net income margin of 9.76% compared to SHOP’s negative 32.49%. Furthermore, SSTK’s trailing-12-month ROCE, ROTA, and ROTC of 17.89%, 12.52%, and 15.36% compare with SHOP’s negative 21.03%, 8.25%, and 3.29%, respectively.
Thus, SSTK is more profitable.
Valuation
In terms of forward EV/Sales, SSTK is trading at 2.07x, 80.4% lower than SHOP, which is trading at 10.57x. SSTK’s forward EV/EBITDA ratio of 7.62x is 96.5% lower than SHOP’s 218.94x. Also, SSTK’s forward non-GAAP PEG multiple of 1.14 is 9.5% lower than SHOP’s 1.26.
POWR Ratings
SSTK has an overall rating of B, translating to Buy in our proprietary POWR Ratings system. On the other hand, SHOP has an overall rating of D, which equates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SSTK has a Value grade of B, consistent with its forward EV/EBITDA and EV/EBIT of 14.46x and 7.62x, 3.5% and 10.8% lower than the industry averages of 14.98x and 8.24x, respectively.
On the other hand, SHOP has a D grade for Value, justified by its forward EV/EBITDA and EV/EBIT of 218.94x and 225.68x, significantly higher than the industry averages of 18.26x and 14.29x, respectively.
Moreover, SSTK’s C grade for Stability is in sync with its 24-month beta of 1.39, whereas SHOP’s Stability grade of D justifies its 24-month beta of 2.64.
Of the 29 stocks in the D-rated Internet - Services industry, SSTK is ranked #2, while SHOP is ranked #19.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Quality, and Sentiment. Get all ratings of SSTK here. To view SHOP’s ratings, click here.
The Winner
The internet services industry could maintain its upward trajectory and experience robust growth due to rapid internet penetration. Therefore, SSTK and SHOP could benefit from industrial tailwinds.
However, given SSTK’s robust profitability scenario, attractive valuation, and favorable bottom-line estimates, the stock could be a better choice than SHOP now.
Moreover, SSTK’s quarterly dividend of $0.27 per share of outstanding common stock, payable to stockholders on June 15, 2023, reflects its shareholder payback abilities. Therefore, investors seeking a stable return could consider buying this stock.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Internet - Services industry here.
What To Do Next?
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SHOP shares were trading at $62.59 per share on Tuesday afternoon, up $2.67 (+4.46%). Year-to-date, SHOP has gained 80.32%, versus a 12.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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