The price of Shopify’s stock today is less than five times projected sales for the following year. They have increased by 52% annually over the past three years.
Wall Street decided to sell the stock as a result of slowing growth and mounting losses, primarily due to concerns that a recession in 2023 will make matters worse.
Those concerns might not be accurate or they may understate the difficulties the e-commerce platform will face. Let’s examine whether the stock is a good buy for investors right now keeping those competing scenarios in mind.
What is Shopify and How Does It Work?
The provider of the e-commerce platform aids companies in opening an online presence. A close rival is the recent IPO BigCommerce (BIGC). Google, Amazon (AMZN), Microsoft (MSFT), Adobe (ADBE), and Facebook (FB), however, are also pushing to offer e-commerce solutions for companies.
The SHOP platform is used by 1.75 million merchants in 175 nations to market and sell their goods. The software provider receives subscription fees in return. For small businesses, subscriptions start at $29 per month and go up to $2,000 for large organizations. Under the general heading of “merchant solutions,” it also provides fulfillment, shipping, and digital payments.
Shopify projects that it currently holds 9% of the American market. e-commerce retail market — more than eBay (EBAY), Apple (AAPL), and Walmart (WMT), but behind Amazon, which has a 39% share.
Earnings News Suggests Mixed Performance for Shopify
The most recent earnings report from Shopify was a mixed bag for investors. The platform continues to draw more buyers and merchants, which is good news. In the third quarter, which ended in late September, sales increased by 22% year over year; over the previous three years, they increased at a compound annual growth rate of 52%.
However, there were a few indications of fragility. Since the early stages of the pandemic, Shopify’s growth rate has significantly slowed. Compared to the over 90% increase that investors witnessed in 2021, the most recent 22% increase seems insignificant.
Shopify is also losing money. As the company works to get its costs in line with the slower growth profile, operating losses are expected to increase going forward. Operating losses reached a staggering 25% of sales in the third quarter.
Reasons to Buy Shopify Stock
However, there are valid reasons to like the stock at the moment. After the current post-pandemic hangover, the e-commerce sector is expected to experience many more years of growth, and Shopify continues to hold a strong position in it. In Q3, the platform handled almost $50 billion worth of merchandise volume, and merchants are increasingly choosing ancillary services like integrated point-of-sale hardware and payment processing.
And the losses ought to stop shortly. Shopify has been slashing costs for several quarters, ever since management realized that the pandemic-related demand surge wouldn’t remain permanent. Over 50% of sales represents a strong gross profit.
The main reason to avoid the stock is due to worries that Shopify’s current operating trajectory won’t improve or will worsen over the next few years. The company’s return to profitability might not happen until 2024 or later if there is a recession that further reduces demand for online purchases.
But it appears more likely that Shopify will continue to grow its market share while also enhancing its profit margins. Even though a stronger economy in 2023 would be beneficial, the platform can still expand in the kind of slow-selling circumstances that prevailed in late 2022. The increasing number of merchants using Shopify is evidence that there will always be a demand for services that make online selling simpler.
The stock has been discounted in line with the rise in business risks. Shopify stock is currently available for about 9 times annual sales, as opposed to over 60 at its 2021 valuation apex.
Yes, the earnings outlook for the upcoming quarters may not be great, particularly if a recession occurs. But when they look back in a few years, investors who purchase the stock now, when Wall Street is so negative, will probably be glad they did.
Investors who are more cautious may want to hold off until there are clear indications that Shopify has stopped generating sizable net losses. The price for that clarity will be higher though. Growth stock investors can ignore the current volatility as they patiently hold Shopify shares for the long term.
Should I Buy Shopify Inc (US) Stock?
The overall value, growth, and quality grades for Shopify Inc (US) stock are F, B, and C, respectively.
Your unique goals, risk tolerance, and allocation will ultimately determine whether or not you should purchase Shopify Inc (US) stock. AAII will be able to assist you in determining which investments fit your needs the best and which ones don’t.
Finally, it’s critical to assess a stock by contrasting it with others in the same sector. See how Shopify Inc (US) stock compares to that of its rivals by looking at the table below. To view the stock grades for value, momentum, quality, and EPS revisions for any of the tickers below, simply click on that ticker.
Concluding Thoughts: Shopify Looks Attractive
In the field of online shopping, Shopify has long been a market leader. As it adds appealing features to its product line, like POS and Shopify Markets, it continues to attract new clients. Positive Q3 results are the main reason why the stock has increased since it reached an all-time low of $23.63 in October 2022. Despite the rally, there is still room for growth because the company appears to be on track to achieve profitability again in 2019.
I think the current SHOP stock price presents an alluring entry point for investors given the appealing risk-to-reward potential.
Is Shopify a Buy Sell Or Hold?
Based on 10 buy, 18 hold, and 3 sell ratings, Shopify has received a conensus rating of Hold. The average price target for Shopify is $47.83. This is based on 31 12-month price targets from Wall Street analysts that were released in the previous three months.
What is the Future for Shopify Stock?
A median price target of 50.00 has been set by the 36 analysts who are providing 12-month price projections for Shopify Inc., with high and low estimates ranging from 65.00 to 32.00. From the most recent price of 43.57, the median estimate represents an increase of +14.76%.
Why is Shopify Stock Down?
Shopify (SHOP), an e-commerce company, reported fourth-quarter earnings and revenue that exceeded analyst expectations. Shopify’s March quarter revenue outlook, however, fell short of expectations.