Is Shopify Stock a Buy Now?

The investment thesis for Shopify (SHOP -2.01%) has changed significantly over the past few years. It is no longer a customer acquisition story -- it's a customer expansion story. This introduces some new challenges but can also be a valid way to grow the business.

With Shopify in its new business phase, is the stock a buy? Or should investors steer clear? Let's find out.

Shopify announced a new offering earlier this year

Shopify provides e-commerce infrastructure to clients of all sizes and also has some products for in-store capabilities. In 2020, almost every business that didn't have an online presence rushed to set up its systems thanks to the COVID-19 pandemic. That wave provided a massive influx of customers for Shopify, but only so many clients are available.

Now, Shopify is focused on getting those customers to adopt more products. Its solutions include Shop Pay (Shopify's proprietary payment-processing system), global expansion, and shipping logistics. Essentially, Shopify is trying to become a one-stop shop for all things commerce, but it's also working on integrating with other products.

In January, Shopify introduced Commerce Components, which allows clients to pick parts of Shopify's ecosystem and integrate them with other providers. For example, a business might use Shopify's payment system or adopt its global-marketing technology. This expansion has already captured a big customer: Toy maker Mattel has become one of the first clients to adopt this solution. However, Shopify didn't provide any insight into what individual products Mattel adopted.

While this may seem like a smart business strategy, is it impacting its financials?

Shopify's operating expenses are growing faster than revenue

Shopify divides its revenue into two streams: merchant solutions and subscription solutions. Subscription solutions are the essential products businesses purchase and continuously pay for when getting set up on their platform, while merchant solutions are add-ons that their clients choose, like Shop Pay. Clearly, Shopify's plan is working according to its growth.

Data source: Shopify. YOY = Year over Year.

Total revenue increased 26% in the fourth quarter, and Wall Street analysts also expect this success to continue into 2023 and 2024, projecting 19% and 21% growth, respectively.

While Shopify continues to deliver on the top line, it's still working toward profitability. In Q4, Shopify's operating expenses increased by 46% year over year, although its Deliverr acquisition attributed a decent amount to this growth. Still, when a company's expenses grow at nearly double the pace of its revenue, it's not a recipe for success.

To improve its profitability, Shopify enacted some layoffs last July and was one of the first tech companies to do so. However, management believes it has reduced its staff to adequate levels, so investors shouldn't expect any more.

With Shopify growing its revenue quickly, investors must continue to watch its operating expenses. If these expenses continue to rise at a quicker-than-revenue pace, it's a huge red flag that Shopify may be unable to turn the profitability corner. But that's in the future; what about the stock now?

Because Shopify isn't profitable, we'll have to value Shopify using a price-to-sales (P/S) ratio. At 10 times sales, Shopify isn't cheap, but it's not as expensive as it used to be.

SHOP PS Ratio data by YCharts.

At current prices, Shopify isn't a back-the-truck-up buying opportunity. Instead, I think investors can take a small position and watch the company. Still, I'd avoid getting too large of a position unless Shopify's operating margins move in the right direction or its growth explodes higher. There are a lot of great bargains in the market currently, but Shopify isn't anywhere near bargain levels.