Shopify (SHOP 0.38%), one of the hottest growth stocks in recent years, has already declined more than 30% this year.
The e-commerce giant's growth accelerated throughout the pandemic as more merchants opened online stores, but it faced tougher year-over-year comparisons as brick-and-mortar stores reopened. Meanwhile, rising inflation and higher interest rates caused investors to dump frothier growth stocks like Shopify, which traded at 37 times its estimated 2021 sales when its stock hit a record high of $1,762.92 last November.
But now that Shopify's stock has pulled back nearly 50% from its all-time high, should investors consider starting a new position? Let's compare the bear and bull cases for this volatile stock to find out.
Image source: Getty Images.
What the bears will tell you about Shopify
The bears don't like Shopify for three main reasons: its decelerating growth, the competitive headwinds, and its valuation.
Like many other e-commerce companies, Shopify faces slower growth in a post-lockdown market. Its revenue surged 86% during the height of the pandemic in 2020 and still grew 66% year over year in the first nine months of 2021 as more businesses reopened. Analysts expect its revenue to rise 56% to $4.6 billion for the full year, then increase another 33% to $6.1 billion in 2022.
Those forecasts still look impressive, but Shopify also faces plenty of formidable competitors in the e-commerce services space -- including BigCommerce (BIGC +3.44%), Adobe's (ADBE +2.34%) Magento for self-hosted users, and Block's (SQ +1.29%) Square Online. WooCommerce, an open-source plugin that turns any WordPress site into an online store, is also a popular option for more technically advanced users.
There was plenty of room for all of these platforms to expand throughout the pandemic, but the post-lockdown deceleration could force them to compete more aggressively against each other.
Meanwhile, Shopify's costs will continue to climb as it expands its own logistics network, payments platform, and digital ecosystem. Analysts expect its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise 65% to $800 million in 2021 but to grow a mere 4% to $833 million in 2022 as it ramps up its spending again. That forecast implies its adjusted EBITDA margin will decline from 17.5% in 2021 to 13.7% in 2022.
As for its valuation, Shopify still trades at about 290 times forward earnings and nearly 20 times next year's sales. By comparison, BigCommerce -- which isn't profitable yet -- trades at just eight times next year's sales. Those lofty valuations indicate the stock could still have a lot more downside potential if interest rates and other macroeconomic headwinds continue to batter the tech sector.
What the bulls will tell you about Shopify
The bulls will claim that Shopify deserves its premium valuations for three reasons: its platform is disruptive, it's constantly gaining new partners, and it still has room to expand across non-English-speaking countries.
Amazon (AMZN +0.82%) and other massive online marketplaces make it easy for smaller merchants to open third-party stores. But in exchange for that simplicity, they need to pay subscription fees, abide by strict guidelines, and compete against legions of other third-party sellers. They'll also likely need to purchase more marketplace ads and sponsored listings to truly stand out.
Shopify frees merchants from those marketplaces by enabling them to launch their online stores, process payments, fulfill orders, and manage their marketing campaigns. This approach, which lets businesses build their own online presence, locked in 1.75 million businesses at the end of 2020, compared to just 162,261 businesses at the time of its IPO in 2015.
As Shopify expands, it's tethering its e-commerce and payment services to more social media platforms -- including Meta's Facebook and Instagram, Pinterest, and Snap's Snapchat -- to expand into the nascent social commerce market. Those partnerships could help Shopify gain millions of new merchants who sell their products through social media posts. They could also widen Shopify's moat against dominant payment platforms like PayPal.
Shopify enjoys an early mover advantage against its competitors, but it still generates most of its revenue in English-speaking countries. Therefore, it could still expand into booming e-commerce markets like Latin America and Southeast Asia -- which have been dominated by major third-party marketplaces like MercadoLibre and Sea's Shopee.
In its latest conference call last October, CFO Amy Shapero called Shopify's international expansion the company's "third key area of investment" alongside its Shop app and fulfillment network. That overseas effort has mainly focused on English-speaking markets like the U.K. and Australia so far, but I believe it could eventually expand into non-English speaking markets as well.
Shopify believes those strengths will enable it to build a "100-year company." That's a bold claim, but Shopify could continue to grow as long as smaller merchants want to build their own online presence.
Don't buy a great company at the wrong price
Shopify is a great company with a bright future. There's still plenty of room for Shopify and its peers, many of which serve larger or more technically advanced merchants, to continue growing as Amazon and other massive online marketplaces spark revolts among smaller third-party sellers.
Unfortunately, Shopify's high valuations still prevent it from being a worthy investment in this wobbly market. Investors shouldn't pay the wrong price for this great company, so they should wait for its valuations to cool off to more reasonable levels before starting a new position.
