Is Shopify Stock a Buy?

Shopify (SHOP -2.37%) has had a tremendous year. It eclipsed 1,000,000 customers, launched a fulfillment network, and raised its outlook for full-year revenue again in the most recent quarter. No wonder its stock is up 165% so far this year. This e-commerce platform seems to be executing in top form, but is it a buy hovering close to its 52-week high? Let's start by diving into its recent results.

SHOP data by YCharts

How is Shopify doing today?

Shopify is projected to grow revenue at 44% for full-year 2019 to $1.55 billion, which is 7.5 times its revenue from just four years ago. Its impressive growth has vaulted this e-commerce start-up into the number three spot for share of e-commerce sales in 2018, behind eBay and Amazon. Even with its slowing growth, it should take over the number two spot from eBay in the next few years.

Image source: Getty Images.

The company is spending its profits on platform improvements and acquisitions to fuel growth. One key area of investment is the $1 billion it is spending to implement a fulfillment network that will provide a more merchant-friendly alternative to Amazon's third-party logistics. This has been a longtime pain point for merchants, and thousands have expressed interest in the early access program. The company is expected to continue to be unprofitable as it invests in its business. With its $2.7 billion in cash and marketable securities, it has sufficient funds to lose money for years to come.

Even though the company has become a larger player, there is plenty of room to run. 

Growth opportunities ahead

It might surprise some, but e-commerce is still a small portion of overall retail sales. E-commerce captured only 11.4% of sales last holiday season in the U.S., and globally it is expected to account for 14.1% for all of 2019. Online shopping is here to stay as tech-savvy millennials and Generation Z become larger portions of the workforce every year. Shopify is well positioned to ride this trend, reporting a 61% gain over last year in spending on its platform during the recent Black Friday-Cyber Monday holiday shopping weekend. 

Surprisingly, the software allowed entrepreneurs to create online stores only in English until 2018. Over the last two years, it has focused on providing local-language and multicurrency capabilities. With only 23% of its revenue outside of the U.S. and Canada at the end of 2018, there's plenty of international opportunity for this e-commerce platform to grow.

When looking at this stock to add to your portfolio, the growth opportunities and its ability to capitalize on the e-commerce trend are not in doubt, but it might be too pricey for many investors, especially when the company is not producing profits.

But isn't it too expensive?

Shopify looks pricey. There are some who think it might be time to dump this stock due to its lofty valuation. It has no earnings, so its price-to-earnings ratio can't be calculated. Even the price-to-sales ratio (P/S), a common metric used to compare growth companies without profits, is high compared to others. Here's a sampling of tech companies that have quarterly revenue growth exceeding 40% and the associated P/S ratios.

Data source: Yahoo! Finance.

There's no argument that the stock seems expensive, but compared to its opportunity, the company looks as if it's just getting started. Global e-commerce spend is expected to be $3.5 trillion this year and to grow to $6.5 trillion in 2023. Conservatively estimating Shopify's Q4 gross merchandise volume (the amount consumers spend buying goods on the platform) at 50% higher than last year, total GMV for 2019 would be $61.5 billion. That's less than 2% of the total estimated online spend for 2019, plenty of room to grow for this proven operator.

Buying shares of Shopify is a great way to get a stake in the long-term trend of e-commerce. It's an excellent company that will undoubtedly be much bigger five years from now. But this stock is not for everyone. A lofty valuation means that any bad news or earnings "miss" could result in the price taking a hit. If you have a long-term view and are willing to treat pullbacks as buying opportunities, I'd consider buying a "nibble"-size portion versus a "stuff your face"-size one.