Ark Invest founder and CEO Cathie Wood is known for investing heavily in emerging technology companies. One of the top holdings among her exchange-traded funds (ETFs) is e-commerce platform Shopify (SHOP +8.34%). If you've ever made a purchase from an ad on Facebook, Instagram, or other social media platforms, chances are you've used Shopify.
The company supports both large retailers and small- to medium-sized enterprises (SMEs) by helping them sell products, market the business, and manage customer expectations. Given that the holiday season is underway and consumers are out shopping, this is an important time for Shopify.
Though the stock has more than doubled year to date, it's still trading nearly 60% off its all-time high. This presents investors with a long-term opportunity in a leading e-commerce company.
NASDAQ: SHOP
Key Data Points
An impressive holiday weekend
Following the Thanksgiving holiday in the U.S., consumers flocked online and to brick-and-mortar retailers to take advantage of Black Friday and Cyber Monday promotions.
In Shopify's early November earnings call, management stated, "[O]ur expectations for growth in Q4 reflect the continued strength of our business, and the year-over-year growth rate reflects a tougher comparison to Q4 of last year, which was our highest quarterly growth rate last year and included [a] particularly strong Black Friday, Cyber Monday weekend."
Specifically, management was guiding for "a year-over-year growth rate in the low-to-mid-twenties", down from the 30% growth reported in Q3, due to last year's robust holiday season. But according to a preview of Black Friday and Cyber Monday results, 2023 has turned out even better.
During the holiday weekend, Shopify merchants generated $9.3 billion in gross merchandise value (GMV), up 24% year over year. Moreover, last year, 52 million consumers purchased from Shopify-powered brands, but this year, that figure increased to 61 million.
The company also saw a 60% increase in purchases made with Shop Pay, the company's online checkout feature.
Although the results above are encouraging, these figures are just for one weekend. The holiday season is still in full swing, and the Black Friday weekend activity hints at what's to come in December.
Image source: Getty Images
But what about the economy?
When it comes to the macroeconomic environment, it's understandable for some investors to be cautious regarding trends in consumer discretionary spending. While the Federal Reserve has moved aggressively to combat inflation, October's inflation rate of 3.2% was still higher than the Fed's long-term target of 2%. That said, there are reasons to be hopeful this season.
According to consulting firm McKinsey, a "continuous year-end promotional cycle" has been underway since September. This means that brands have resorted to an early start on the holiday shopping season, compared to prior periods. Given this dynamic, it's possible Shopify has been experiencing an uptick in activity for the entirety of Q4, not just during holiday weekends.
Moreover, the McKinsey report also found that 19% of its survey respondents prefer buy now, pay later (BNPL) optionality when it comes to shopping. Not only is BNPL a feature of Shop Pay, but the report shares that 74% of Gen Z and millennials prefer this payment method. Many people among the Gen Z and millennial demographic are active on social media and likely interact with Shopify-powered brands as well.
Should you buy Shopify stock?
Data by YCharts.
From a valuation perspective, Shopify stock looks historically cheap. The company's price-to-sales (P/S) ratio of 14 is hovering near its lowest levels in several years. Moreover, Shopify has done a stellar job getting costs under control and generating positive free cash flow recently. This has helped the company strengthen its overall financial position and invest in new products and services.
With shoppers taking advantage of a longer holiday shopping season, Shopify can benefit from the resulting tailwinds. Furthermore, given the stock's discount to its previous highs, this is an opportunity to scoop up some shares at a bargain.
