In an environment where e-commerce companies have performed well recently, Shopify's (SHOP +3.18%) stock has struggled. Since surging above $91 per share in February, lowered sales guidance seems to have weighed on sentiment. Consequently, it sells at a 33% discount to its 52-week high.
That leaves investors questioning whether they should take advantage of the discounted stock price or hold out for a deeper discount. Still, with its market leadership and continuing growth, it might be time to add a position, and here's why.
NASDAQ: SHOP
Key Data Points
The state of Shopify
In one sense, Shopify looks like it is continuing to prosper. It first grabbed the attention of both prospective customers and investors by producing an e-commerce platform that stood out because merchants could customize it without any coding knowledge. Reasonable pricing and a speedy site also helped it stand out.
It also built a full-fledged ecosystem that could handle most of its customers' other needs. If they require help with email marketing, handling payments, managing inventory, or raising capital, Shopify offers services to address all that.
Grand View Research forecasts a compound annual growth rate of 19% for the e-commerce industry through 2030, and Shopify appears to have capitalized on this burgeoning opportunity.
In the first quarter, its revenue of $1.9 billion rose 23% from year-ago levels. Subscription revenue drove much of this growth, increasing 34% as customers continued to take to its platform.
Investors should note that the failed attempt to enter the logistics business continued to weigh on financials as the company took a $342 million charge related to the sale of that business. That brought a net loss of $281 million, down from the $77 million profit in the year-ago quarter.
What might be hurting Shopify's stock
Nonetheless, a one-time charge is unlikely to derail Shopify stock. Instead, what seems to be affecting it is expectations. For the second quarter, the company forecast a high-teens rate of revenue growth. While still robust, it significantly lags the 23% growth in the first quarter and the 26% it reported in 2023.
The price-to-earnings (P/E) ratio above 850 probably does not reflect its valuation due to the company moving in and out of profitability, though a forward P/E ratio of 63 is expensive by nearly any measure.
However, given its condition, investors should pay more attention to its price-to-sales (P/S) ratio, which now stands at 11. That's not a record low, but it more closely resembles its valuation in 2016, when Shopify was an up-and-coming software company far from earning a profit. That might indicate the stock is actually undervalued in a relative sense.
SHOP PS ratio data by YCharts.
Also, the slowdown in revenue growth might not happen as quickly as Shopify's second-quarter forecast indicates. Analysts predict 21% revenue growth in 2024 and 20% next year.
And the company outperformed analyst revenue expectations in each of the last eight quarters. Thus, investors should not only expect a slower sales decline but also remain open to the possibility of Shopify reinvigorating revenue growth.
Buy Shopify
Considering the state of the stock, investors have probably overreacted to the company's declining revenue increases.
Admittedly, slowing growth is natural even for growth stocks, and some valuation metrics could lead investors to believe that the shares are too expensive.
But Shopify continues attracting new customers, and history indicates that its slowing might occur more gradually than the company has indicated. With a P/S ratio near historical lows, this stock could experience a dramatic recovery as investor sentiment improves.
