After an impressive run from the bear market lows in late 2022, Shopify (SHOP 1.11%) seems to have hit a speed bump. Following the release of its earnings for the fourth quarter of 2023, investors seemed to have turned on the stock, taking it down by over 13% in the next trading session.
However, for those still bullish, the decline may be a hiccup rather than a sign of a longer-term downtrend. As investors take a closer look at its competitive advantages and its history, they may perceive the recent price action as a buying opportunity rather than a reason to turn on Shopify stock.
The state of Shopify
Shopify has emerged as one of the leading providers of e-commerce software. Its site allows for an easy setup for entrepreneurs with no coding knowledge, and the ability to customize a website and conduct speedy transactions has also made it a popular choice.
Shopify has expanded its competitive advantage with numerous ancillary services that cover most needs of e-commerce businesses within the Shopify ecosystem. Payments, email marketing, and capital raising are among the other services Shopify offers.
Indeed, Shopify has made mistakes. It attempted to enter the logistics and fulfillment businesses to expand its ecosystem. Still, Shopify reversed this decision amid high fixed costs, lower stock prices, and financial losses. Since selling that business, the company has returned to profitability, helping the stock to rise significantly.
Other factors have also contributed to its growth. Shopify recently increased subscription prices for Shopify Plus after having raised prices for merchant plans early in 2023. With the difficulties in switching platforms, this move is unlikely to cost it significant business.
Also, it laid off approximately 20% of its workforce, a move partially driven by the sale of the fulfillment business. While that decision was undoubtedly painful, the lower costs likely helped boost the stock.
Why Shopify can still grow
Shopify stock had nearly quadrupled from its 2022 low before the release of the earnings report, which may have led to the post-earnings sell-off. With a forward price-to-earnings (P/E) ratio of 73 and a price-to-sales (P/S) ratio of 15, the stock is richly valued by most standards.
Nonetheless, the sales multiple may offer some hope to investors. Before the 2022 bear market, you have to go back to 2016, not long after its initial public offering, to find a time when Shopify traded below its current P/S ratio.
Also, before the bull market in late 2020 and 2021, the stock's P/S ratio had often exceeded 30, and even during the massive sell-off in early 2020, the sales multiple was much higher than today's levels. Thus, Shopify's P/S ratio is well below historical averages.
SHOP PS Ratio data by YCharts
Furthermore, the product price increases should help boost revenue, which will place significant downward pressure on Shopify's valuation. Unless investor sentiment takes a strongly bearish turn, higher valuations are unlikely to deter prospective buyers.
Consider Shopify stock
After the post-earnings pullback, investors could make a case for adding Shopify shares. Indeed, some investors might have felt the market priced the stock for perfection, and if a bear market returns, its expensive valuation could work against the stock. However, history shows that its P/S ratio is low by historical standards, indicating that low multiples are rare without a bear market.
Moreover, Shopify remains one of the leading e-commerce platforms, and its price increase is unlikely to change that reality. With lower costs and the financial burden of building a fulfillment network gone, Shopify should produce the revenue increases needed to propel the stock higher from current levels.
