Etsy (ETSY) stock is falling rapidly after an earnings release that disappointed the market and could be creating a drag on fellow e-commerce stock Shopify (SHOP) . However, that might be misguided given the differing business models of each company.
Shares of Shopify trended downward by about 1% for much of Thursday, likely feeling the sting of Etsy's plunge that has marked the largest one-day drop in about three years. The release has provoked some caution among investors betting on emerging e-commerce plays, especially as bigger players like Amazon (AMZN) eye expansion into artisan products.
However, Etsy and Shopify are not taking the same approach in terms of selling strategy and that difference is a key aspect of their investing theses.
"A company like Shopify is very different from say an Etsy," Action Alerts PLUS senior portfolio analyst Jeff Marks explained. "Shopify allows merchants to have a direct relationship with the customers they sell to, and act as a "retail operating system" where merchants can start a store with Shopify verily easily and then begin to cross-sell their products across different marketplaces should they chose to do so. But at the end of the day, Shopify's software is the back office system where everything flows back into." (Shopify is a holding in the Action Alerts PLUS portfolio.)
Etsy, by contrast facilitates the relationship and acts as the overseer of purchases much more directly.
In essence, Etsy is playing into Amazon's game by being the marketplace where goods come to be sold, while Shopify is aimed at making merchants on its platform able to build their own brand on a cloud-based shopping platform.
From a valuation standpoint, that is where the real comparison comes in, because both were astronomical by price-to-earnings standards.
Even amidst its slide, Etsy is trading at over 70 times forward price to earnings. Shopify is straining reason even more strongly, rising to almost 365 times next 12 months earnings according to FactSet.
That has led many to call for an Etsy-esque pullback in Shopify shares over recent months.
Many even took to short-selling, which now represents almost 10% of the company's float, which is comparable to Etsy's situation.
"I still think they are best in class," Andrew Left, Citron Research's executive editor, acknowledged in an interview with Real Money. "It's just that when you have a PE ratio over 300, its being priced like nothing bad can happen."
With such a tenuous hold on its rapid gain year to date, Left is currently betting that a pullback is in the cards soon.
"This is a company that is priced for hyper growth. If they lose 15% of their base, their multiple is going to get smacked," Left commented.
Given the pullback in Etsy shares on a relatively positive earnings release on Wednesday, this lofty valuation could be the key similarity to monitor, not the business models.