It has now been a little more than a year since Shopify (SHOP 1.11%) stock began its recovery from the 2022 bear market that wiped out more than 85% of its value. Since reaching an intraday low of $23.63 per share in September 2022, the stock is up almost 240%.
That increase likely leaves new investors and current shareholders wondering what to do about the tech stock. At current levels, can the stock keep moving higher, or has it reached another point of overvaluation as it did in 2021? If it is overvalued, should current shareholders stay in the stock? Investors will need to answer such questions to determine their next steps.
Why investors turned to Shopify
Shopify has stood out in the crowded field of e-commerce platforms in two critical ways.
First, it developed a robust and customizable platform that did not require coding knowledge for one to launch. This meant small merchants could launch a Shopify site without hiring pricey IT personnel.
Second, it developed an ecosystem with most of the ancillary services an e-commerce merchant might need. Inventory management, capital raising, email marketing, and payments are among the functions it offers.
This places Shopify at the center of a massive industry. Shopify has become the leading platform in the U.S., but globally, it lags behind WordPress plug-in WooCommerce and Squarespace.
Image source: Datanyze.
Nonetheless, Mordor Intelligence estimates that e-commerce has become a $9 trillion industry that will grow to $19 trillion by 2029, a compound annual growth rate of 16%. Given Shopify's market cap of just over $100 billion, it likely means that Shopify has barely scratched the surface of its potential.
Shopify's recent stock behavior
One of the ancillary functions contributed to both Shopify's decline and its subsequent recovery. That function was a logistics arm to provide fulfillment and shipping services.
However, the cost of building such a network strained the company's financials and turned Shopify into a money-losing operation. As the burden became too heavy, it sold this business. Unloading its logistics business helped to spur profitability in the third quarter of 2023 and likely led to its stock price recovery.
Where Shopify stands now
Despite its improvement, Shopify stock still sells at a 45% discount to its all-time high from 2021. Since Shopify grew its revenue throughout the bear market, some might assume the upward move in the stock can continue.
The bulls have a strong case. Shopify's 2023 projection for revenue calls for a "mid-twenties percentage rate" over the previous year. Revenue in the first three quarters of 2023 came in at around $4.9 billion, a 27% increase. Although it lost $525 million in that nine-month timeframe, a $1.3 billion impairment from the sale of the logistics business indicates that Shopify's core operations are again profitable.
The valuation measures offer a more mixed picture. Its forward price-to-earnings (P/E) ratio of 78 is probably skewed higher by its recent return to profitability. But its price-to-sales (P/S) ratio, which stands at around 15, does not make this stock a bargain by any measure.
Nonetheless, Shopify has not been a value stock at any time in its history, and that sales multiple is consistent with pre-pandemic levels, indicating that multiple expansion is well within the realm of possibility.
Should investors buy, sell, or hold?
At current levels, investors should feel comfortable adding shares of Shopify stock. Indeed, it trades close to its 52-week high and has experienced a massive surge higher over the last 16 months. However, Shopify has emerged as an industry leader in the expanding e-commerce business. With the company continuing to drive growth, the stock is unlikely to stop rising anytime soon.
