A once promising year is starting to unravel for Shopify (SHOP 0.28%) investors. Shares of the e-commerce platform provider have shed 27% of their value since hitting all-time highs this summer, and a year-to-date gain that stood at a hearty 75% at its July peak is whittling down to a 28% advance in 2018.
Could the ringing you hear be a dinner bell? Could it be a warning bell? Now is probably a good time to size up Shopify and see if a stock that had nearly quadrupled through the two previous years can get back on track for its shareholders.
Image source; Shopify.
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Let's start with the Shopify business model. More than 600,000 merchants rely on the online platform that intuitively gets aspiring and established merchants selling their wares online. Shopify basic plans start at $29 a month, with a Shopify Lite option setting folks back just $9 a month for a pared-back platform.
Getting noticed as an upstart e-tailer isn't easy, but Shopify helps merchants expand their reach with its platform where it's easy to populate a digital storefront across various potential entry points. Shopify works, and while some critics have knocked it for its affiliate marketing initiatives in the past, it's hard to argue with success when you go over the numbers.
Revenue rose 58% in Shopify's latest quarter, as a 68% surge in merchant solutions revenue helped lift a 46% surge in subscription revenue. Don't snooze on the revenue mix, as it's a pretty strong endorsement for the Shopify model. Merchant solutions consists of fulfillment, financing, and completed transactions, and that segment growing faster than subscription revenue -- it now accounts for more than half of Shopify's business -- is a testament to Shopify's success. Gross merchandise volume is outpacing subscriber growth, and that means that Shopify is generating more business to the average merchant.
Shopify is the real deal, and it will top $1 billion in revenue for the first time this year. This doesn't mean that there isn't a bearish case to be made here. Shopify stock isn't cheap. It's fetching nearly 190 times next year's projected earnings, and trading just below 10 times next year's top-line target.
Wall Street is bracing for decelerating revenue growth in the future, but it's not a deal breaker. It's not as if Shopify will be the punchline of growth investor humor given the nearly 40% spurt on the top line that it's expecting to clock in with next year. Shopify is giving merchants an easy way to start selling online, and now the stock's swift correction is giving investors the right incentive to start buying the stock.
