Shopify (NYSE:SHOP)
With the start of the disinflationary process and the company’s aggressive expansion in recent quarters despite a difficult macroeconomic environment, Shopify’s (NYSE:SHOP) stock is again gaining traction. Shopify stock have already appreciated by about 30% since the beginning of 2023. Shopify’s stock is uninvestable on a purely fundamental basis since the firm is barely profitable, and its shares trade at a multiple of anticipated sales that looks excessive, given that the company is still growing rapidly.
The Shopify stock should rise even more in the coming months if the macroeconomic situation continues to improve due to the company’s persistent aggressive growth made possible by developing its comprehensive ecosystem of goods and services that continue to be in high demand. This article aims to help you decide whether or not it is worthwhile to include Shopify in your portfolio by explaining the company’s significant growth catalysts that might allow its stock to gain further, as well as the hazards of owning the business’ shares at the present levels.
Overall Context
Shopify’s recent financial report for Q4 indicated that its sales climbed by 25.4% Y/Y to $1.73 billion during the quarter, proving that the company can create aggressive returns even in the challenging climate. Yet, its $197 billion in gross merchandise volume in FY22 shows a huge demand for Shopify’s solutions among merchants who use the platform to manage their operations.
Shopify’s vast ecosystem of solutions for various companies makes it more than just a website builder. It gives it a competitive edge in eCommerce and guarantees rapid future growth. Shopify has been able to boost its income and the number of its customers despite the present economic climate because of its investments in numerous growth drivers over the last several years.
In the wake of the Covid-19 outbreak, I migrated all of my online storefronts to Shopify from WordPress and Woocommerce because of the latter’s superior ecosystem of tools for streamlining and monetizing company operations. But, there are indicators that Shopify’s meteoric rise is not yet ending.
Shopify’s solutions are in great demand, giving the untapped global eCommerce industry a huge potential for expansion. With around 28 percent of all traffic coming from clients outside the merchant’s native market, Shopify has allowed $28 billion in cross-border sales by 2022. As a result of the regional localization of their websites for different markets, Shopify merchants are likely to see an increase in cross-border sales since Shopify Markets has recently been released. However, the company’s flagship Shopify Payments solution, which replaces third-party payment providers and decreases transaction fees, is currently only available in 22 countries. As a result, the company’s first-party payment solution is currently available to only some of its merchants. Shopify’s POS system bridges the gap between its merchants’ online and brick-and-mortar operations and is limited to only 14 countries. Shopify also offers a payment option with its Shop Pay and Shop Pay Installments. However, these are currently in testing. This plethora of possibilities indicates that Shopify has many opportunities to develop further.
The good news is that Shopify is still able to earn exceptional returns that might assist its stock to further appreciate in the future, even if its flagship products are not yet accessible to all of its merchants across the world. Shopify’s revenue is projected to increase by 19% year-over-year in FY23 and by more than 20% year afterward. Shopify’s non-GAAP profitability is forecast to hit rock bottom in FY23, following which rapid expansion is anticipated. Combine this with the fact that, despite the macroeconomic challenges, the global eCommerce market is expected to grow at a double-digit rate in the coming years. It’s clear that Shopify has more than enough opportunities to grow its business at an aggressive rate. This is one of the key reasons investors see potential in Shopify stock at its current price.
There Is Much More to Think About
Despite the company’s continued fast expansion, there are several factors that investors should think about before determining whether or not to include Shopify’s shares in their portfolio. Firstly, recent data reveals that retail sales are already slowing down. Interest rates may go substantially higher or continue at the present levels for a lengthy period, drastically decreasing consumer confidence and potentially shattering Shopify’s growth narrative.
In addition, the high price of Shopify stock is one of the main concerns for investors. The company’s stock receives a D+ valuation grade from Seeking Alpha’s Quant system since it trades at over 10 times the anticipated sales. As the firm is still having trouble turning a profit according to GAAP (its fourth quarter GAAP EPS was -$0.49, below street projections by $0.32), it is difficult to propose that value investors purchase shares of Shopify.
Shopify’s expansion, however, is also vulnerable to threats from other businesses. One of Shopify’s main competitors right now is Amazon’s Purchase with Prime button, which allows users to buy items from online retailers directly using their Prime memberships instead of going via Shopify. Recently, Amazon increased the button’s functionality and made it easier for businesses to adopt the Fulfillment by Amazon (FBA) business model. The Purchase with Prime button has been shown to enhance conversions by 25%, which might encourage additional e-commerce sites to use it.
The fact that Shopify now explicitly forbids merchants from adding the Purchase with Prime button to their Shopify-based websites, citing the breach of the terms of service, suggests that the company views Buy with Prime as a threat to its business model. Store owners may switch to a different platform and add Amazon’s Prime features to boost sales, despite rumors that Shopify is negotiating with Amazon to reach a common ground.
Conclusion
Shopify’s stock is still a battleground between value and growth investors. One camp holds that the stock price will fall because of the deteriorating macroeconomic environment’s overvaluation. At the same time, another believes that the stock price will soar owing to the disinflationary process and the rapid growth rate predicted by the company. Therefore, if you have a pessimistic outlook on the market, owning Shopify at the current prices makes no sense. However, if you believe the recession is avoidable, inflation will significantly subside over the next quarters. Shopify could be a decent investment for your portfolio, provided you are willing to take on a high degree of risk.
Featured Image: Unsplash @ Roberto Cortese
