There's serious money to be made investing in cloud-based platforms helping companies reach their customers. Shares of Shopify (NYSE: SHOP) and Zendesk (NYSE: ZEN) have been some of the market's biggest winners since the start of last year, more than tripling on both fronts.
Shopify with its intuitive and seamless e-commerce platform has grown to serve the needs of more than 600,000 digital storefronts. Zendesk offers online customer support at a fraction of conventional assistance, and its reach now tops 130,000 accounts. Shopify and Zendesk are experiencing a boost in popularity for their platforms, but what if you could only buy one? Let's pit the two market winners to see which one is the better purchase these days.
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Revenue growth is decelerating at both companies, but this doesn't mean that Shopify and Zendesk aren't growing faster than most of the stocks in your portfolio. Shopify's top line rose 62% in its latest quarter, making this the dot-com darling's tenth consecutive period of decelerating revenue growth. Shopify is growing nicely through both of its revenue categories, as subscription and merchant solutions experienced growth spurts of 55% and 68%, respectively.
Shopify shares still took a hit following its seemingly resilient summertime report. Investors were concerned with weak guidance, as Shopify is targeting a top-line gain of 48% to 50% in the third quarter.
Zendesk's latest quarter received a rosier market reception. It's not growing as quickly as Shopify. Revenue climbed 39% for the second quarter. Its guidance also implies continuing deceleration, with revenue pegged to rise 32% to 35% in the third quarter. However, analysts were targeting a much weaker third quarter, and several Wall Street pros would go on to jack up their priced targets on Zendesk following its report. It was an entirely different scene for Shopify.
Both companies are tearing the cover off the ball on the bottom line. Shopify and Zendesk are landing well ahead of analyst profit targets -- each one is 4-for-4 over the past year -- and it's not even close.
The earnings success makes sense. Both platforms are growing in popularity, and theses are scalable businesses. Shopify and Zendesk are also finding new ways to cash in on their satisfied customers, boosting average revenue per account.
Shifting to valuation is where the cheerleading sobers up. Neither stock is cheap by conventional measuring sticks. Shopify and Zendesk trade price-to-sales multiples in the teens, high even for dynamic growth stocks. It's an even scarier checkup at the other end of the income statement. Shopify and Zendesk are just starting to come into their own when it comes to profitability, but investors are still valuing these companies more on the top-line growth than their near-term earnings potential. Even if we go out to 2019, we see Shopify and Zendesk trading at triple-digit earnings multiples.
Lofty valuations paired with sharply decelerating growth is a tricky combination. The risks run high for both stocks. There are also plenty of ways out there for merchants to get online and businesses to provide customer support. The battle is close, but Shopify will get the nod because it's growing faster than Zendesk and should continue to do so through the next couple of years at least. Both stocks are susceptible to sharp corrections, but it's hard to bet against the strong fundamentals for both platforms.
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