Shopify (SHOP 4.37%) has been one of the top stocks on the market over the past decade as it's established itself as the clear leader in e-commerce software, challenging Amazon along the way as few other companies have.
However, Shopify stock crumbled in the 2022 bear market. The blistering growth it experienced during the pandemic faded, like the rest of the e-commerce sector, and it reckoned with poor strategic decisions like its acquisition of Deliverr, which it later sold off.
Shopify continues to grow, but the stock does seem to have lost some of its luster. Is the e-commerce disruptor worth buying today? To answer that question, we asked a bull and a bear to weigh in on the stock. First we hear the bull case.
Image source: Getty Images.
Plenty of room to run
Jeremy Bowman: Shopify stock is still down more than 50% from its pandemic-era peak, but the company is outgrowing competitors, and e-commerce in general continues to gain market share from brick-and-mortar retail and other channels. The software-as-a-service (SaaS) stock seems to have rebounded from a post-pandemic lull.
Revenue rose 25% in its third quarter to $1.7 billion, buoyed by 22% growth in gross merchandise volume (GMV) to $56.2 billion. The company has historically struggled to turn a meaningful profit, but it's making progress with a 36% increase in gross profit in the third quarter to $901 million, and it's also brought overhead expenses like research and development and sales and marketing under control, posting a generally accepted accounting principles (GAAP) operating profit of $122 million.
So Shopify is currently delivering strong results, but the company still has an attractive growth opportunity. It's increasingly targeting brick-and-mortar businesses, elbowing into Square's domain with its all-in-one mobile point-of-sale system. It's also reached a detente with Amazon, as Shopify merchants can now use Buy with Prime, allowing Prime subscribers to get Prime deliveries from Shopify sellers. Shopify is aiming to penetrate the business-to-business commerce arena as well with a new partnership with Faire and WPP, one of the world's biggest advertising agencies.
Online-enabled commerce will continue to grow, and Shopify will continue to lead that charge. While the stock is expensive, its leading position in the massive and growing digital commerce market is worth paying up for now.
NASDAQ: SHOP
Key Data Points
Does the growth justify the premium?
Jennifer Saibil: Shopify's growth has decelerated sharply from high double digits early in the pandemic to just 25% in the 2023 third quarter.
Despite that, investors are excited about Shopify's opportunities. The stock's price keeps rising and is up 111% so far this year. At the current price, Shopify stock trades at a price-to-sales ratio of 14, which is steep, especially with its sales growth having slowed to the low double digits. Hopefully, investors are learning in this bear market that valuation matters and exciting prospects are not the same as real performance.
Can Shopify's current growth justify such a high premium? The average Wall Street consensus is for its stock to fall over the next 12 to 18 months, with the highest analyst target price only 12% higher than it is today.
Wall Street could be totally wrong, and confident investors have defied Wall Street's thoughts to push the price up this high. However, what often happens when investors become too confident is that the stock can't handle the astronomical valuation, and the price falls.
Long term, Shopify may have a fantastic future ahead. But if you buy today, you might be setting yourself up for near-term losses when you could put your money to work elsewhere and save yourself the anxiety of hoping the stock will rise. Shopify might become a great stock to buy if the valuation becomes more attractive, but now doesn't look like the right time.
