Please ensure Javascript is enabled for purposes of website accessibility

Is Shopify Stock a Buy?

By Will Healy - Sep 9, 2020 at 8:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors may not have priced valuation and competitive challenges into the stock.

Shopify (SHOP -1.18%) mystified investors for much of the year. Even at the depth of the bear market in March, this tech stock appeared expensive. Today, it trades at more than triple that price. Shares recently rose to record levels as its e-commerce partner Walmart introduced Walmart+. Shopify will likely benefit from this offering as some of its merchants now list products on

However, since hitting an all-time high in early September, the stock has lost close to 20% of its value as of the time of this writing. Still, it trades at levels first seen in late June. Now, investors have to decide whether the upside has paused temporarily or if the stock is set up for a massive drop?

Shopify's valuation

Shopify's forward price-to-earnings (P/E) ratio of about 476 speaks to how expensive the stock has become. Moreover, the fact that Shopify stock sells for almost 61 times sales confirms this sky-high valuation. The average price-to-sales (P/S) ratio for the last five years stands at about 21.

Massive growth in the company's stock price fueled this multiple. In March, it fell to about the $300 per-share range in a market sell-off. As the market recovered, it went on a tear, surging almost to $1,150 per share by early September.

SHOP Chart

SHOP data by YCharts

Indeed, the company has logged impressive growth over the last year. According to the latest quarterly report, gross merchandise volume spiked by 119%, while revenue rose by 97% from year-ago levels. This helped to make the company profitable, reporting $0.29 per share in profits compared to a net loss per share of $0.26 in the same quarter last year.

All this occurred amid COVID-19-related shutdowns. The pandemic has helped as retailers scrambled to take their catalogs online. New store creation grew by 71% between the first and second quarters of 2020. The fact that Shopify temporarily extended its trial period from 14 to 90 days may have facilitated some of this growth.

Man shopping from home on a laptop while wearing a mask.

Image source: Getty Images

Shopify and the competition

The earnings increases should continue. Businesses continue to offer e-commerce options in increasing numbers. According to Grand View Research, the global business-to-consumer e-commerce market attained a value of $3.35 trillion in 2019. It forecasts a compound annual growth rate (CAGR) of 7.9% through 2027.

Moreover, many shops may prefer to run their platforms independent of Amazon or platforms such as Etsy. That is where Shopify can help.

However, it might come as a surprise that Shopify is not the number one platform in the U.S. According to Oberlo, about 23% of businesses turn to WooCommerce, an open-source plugin on WordPress. Shopify is a close second at 21%. At 15%, Wix Stores is the only other platform with a double-digit market share. Several other players, including Abobe's Magento, register a minimal percentage of the U.S. market.

Is Shopify stock still worthwhile?

With investors are paying almost 60 times sales for a company that is not first place in its industry, anything could happen with Shopify stock. Still, at its current multiple, Shopify has reached a point where investors may have to wait years for long-term returns.

Also, should a sell-off take Shopify stock back to its average P/S ratio, new buyers would lose close to two-thirds of their initial investment.

Although the end of COVID-19 will temporarily slow the move to e-commerce, retailers of all sizes will almost certainly continue migrating to e-commerce. I expect Shopify to remain a major player in that industry. However, at some point, valuation matters, and even the most risk-tolerant investors should think twice before buying at these levels.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Adobe Systems, Amazon, Etsy, Shopify, and and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Shopify Inc. Stock Quote
Shopify Inc.
$36.86 (-1.18%) $0.44
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$139.07 (-0.32%) $0.45, Inc. Stock Quote, Inc.
$142.30 (0.14%) $0.20
Adobe Inc. Stock Quote
Adobe Inc.
$439.03 (0.28%) $1.21
Etsy, Inc. Stock Quote
Etsy, Inc.
$114.45 (-2.10%) $-2.46 Stock Quote
$72.83 (0.22%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.