The "Magnificent Seven" stocks seem to be getting all of the attention these days, and for good reason. As a group, these dominant businesses have seen their shares soar since the start of 2023. Investors appreciate their growth prospects and focus on tech innovation and disruption.
But that doesn't mean there aren't other places to shop around for businesses to invest in. Take a look at Shopify (SHOP +0.15%), which recently reported its 2023 fourth-quarter financial results. Investors didn't seem pleased with the numbers, sending shares down double digits on the news. They're now 55% below their all-time high.
Can this beaten-down e-commerce growth stock outperform the Magnificent Seven between now and 2029?
Registering tremendous growth
While many companies continue to be challenged in the current macroeconomic environment, Shopify is posting superb growth. Gross merchandise volume and revenue in Q4 jumped 23% and 24%, respectively, year over year. That sales figure has decelerated for two straight quarters, which might be what investors were concerned with.
As a dominant e-commerce platform that provides the technological infrastructure, software, and services that let any merchant set up an online store and smoothly operate its business, Shopify is a mission-critical partner for its millions of customers. This means it benefits from powerful switching costs.
There's still a lot of growth potential. Online shopping still has a long expansionary runway to chip away at physical retail. Perhaps more importantly, Shopify plans to capture this opportunity with an ever-increasing array of product features. The most notable introductions center on artificial intelligence (AI) incorporating the technology to improve the merchant and shopper experience.
It's not a surprise that a company in full-on growth mode hasn't been consistently profitable. But things could be turning around. Shopify generated positive net income of $657 million in the last three months of 2023 after bringing in $718 million in Q3.
Wall Street analysts are hopeful. Consensus analyst estimates call for adjusted earnings per share to increase at a compound annual rate of 34.6% over the next three years. Before getting overly optimistic, investors will want to see steady improvements in this area. For what it's worth, management expects operating expenses to be higher in the current quarter than in Q4, so there's still a lot of work to be done.
NASDAQ: SHOP
Key Data Points
One factor to keep in mind
All of these traits are characteristic of the Magnificent Seven businesses, which offer industry-leading products and services that are truly moving the world forward. As it relates to this group, it would be an easy argument to make that if these companies didn't exist, it might wreak havoc on their customers' daily lives. You could say the same thing about Shopify and the millions of merchants that rely on it.
But there's one factor that will have a profound impact on Shopify stock's return going forward, and that's the valuation. As of this writing, shares trade at a price-to-sales (P/S) ratio of 14.1. While this represents a steep discount to its historical average of 22.6, that's an incredibly lofty valuation, in my opinion. Shopify shares look priced for perfection.
Despite the meteoric rise of the Magnificent Seven, their median P/S multiple stands at 7.4 right now, also in line with Apple's P/S multiple. Shopify is more expensive than six of the seven Magnificent Seven members. Only Nvidia trades at a premium to Shopify, with a P/S ratio of 32.3.
You could point to Shopify's outsized growth potential, but then you'd be hoping for several things to go right in the future. Based strictly on the fact that the e-commerce platform's shares don't provide any margin of safety, I wouldn't bet on Shopify beating a basket of the Magnificent Seven stocks over the next five years.
