Shares of Canadian e-commerce sensation Shopify (SHOP) have seen lots of selling in the past few weeks, tumbling ~55% from peak to trough before recovering a bit in the past few sessions. As it stands, Shopify stock is sitting down ~45% from its November peak, at around $970 per share.
Although Shopify is one of few tech behemoths that could defend its ground against the likes of Amazon.com (AMZN), the valuation remains incredibly steep. Despite the significant pullback and negative returns over this past year, shares are still up substantially over the past five years.
Indeed, the drop seems substantial for an investor who bought at or around the peak, but for investors who’ve been in the name for years, the drop may just be a blip in a longer-term chart that remains strong.
That goes to show the dangers of chasing the hottest momentum stocks. While Shopify is one of the most innovative companies in Canada (or even the U.S.), the valuation remains tough to get behind, putting the stock at risk if this tech-focused sell-off is far from over.
For that reason, I remain bearish on the stock. Though I am a fan of the company and would be enticed should a better entry point occur later on in the year.
Shopify: Putting the Power Back in the Hands of Smaller Businesses
Shopify’s e-commerce platform is a cut above the competition. Many small- and medium-sized (SMBs) retailers have embraced the platform.
With a growing number of offerings to upsell such clients and a TAM (Total Addressable Market) that remains sizeable (there are a lot of small businesses out there), Shopify’s growth is doubtful to stagnate anytime soon, even with a market cap that’s well above the $100 billion mark. In that way, Shopify stock certainly seems to share some intriguing growth-preservation attributes common to the popular FAANG stocks in the U.S.
Although high double-digit growth numbers are likely to continue for the e-commerce firm, the COVID-19 pandemic’s impact could stand to make quarter-to-quarter or year-over-year comparables more choppy. As the world moves on from the Omicron wave, comparables could be challenged. Regardless, investors shouldn’t lose sight of the longer-term picture, which will still remain intact.
In the third quarter of 2021, Shopify posted a rare per-share earnings miss, reporting $0.81 EPS, falling short of the $1.09 consensus. The $1.1 billion in revenue was solid, but nothing to write home about. Despite the miss, Shopify stock held its ground initially. That is until broader market forces and a wave of selling hit the high-multiple tech names.
Shopify: Strong Growth, but Can It Resist Further Pain Aimed at High-Multiple Tech?
The company has proven itself as a dominant player in e-commerce. With incredibly convenient offerings, ranging from payments to shipping, the company has the means to carve out a nice slice of market share in other lucrative markets. Payments and shipping are a natural branch of e-commerce, and Shopify has shown its disruptive abilities in its transition from large-cap to mega-cap.
Shopify is innovating at a very fast rate. Such rapid-fire innovation could help it sustain its impressive growth rate for quite a while longer. Although such growth is unsustainable over the very long term, it’s clear that Shopify has already shown it’s not like most other growth companies that succumb to pressures pushing down their top-line growth rates to more sustainable levels.
Just how long Shopify can keep its pace remains to be seen. I think it could continue its pace for years to come, although there will be the odd blip that has some investors hitting the panic button.
Despite Shopify’s many growth pathways, its unfathomably-high TAM, favorable attributes, well-run management team, and secular tailwinds in the e-commerce space, the company has yet to reach sustained GAAP profitability. For that reason, investors will likely continue to ditch shares of Shopify as long as this market continues punishing high-multiple tech.
Wall Street’s Take
Turning to Wall Street, SHOP stock comes in as a Moderate Buy. Out of 18 analyst ratings, there are 11 Buys and seven Hold recommendations.
The average Shopify price target is $1,411.86, implying 45.6% upside potential. Analyst price targets range from a low of $900 per share to a high of $2,000 per share.
The Bottom Line on SHOP Stock
Shopify is such a tremendous growth company. It’s doing nearly everything right. However, at the end of the day, it is a growth company with a high multiple—a very high one at that. This alone could leave it at risk of excessive downside for investors who get too aggressive with their dip-buying.
At writing, SHOP stock goes for 26 times sales. Shopify deserves a rich multiple, but is its current multiple pushing it in a year where interest rates could rise quickly? Possibly.
In short, Shopify stock is a wonderful business trading at a questionable valuation.
Had this market not concentrated its selling in the tech and growth areas, I would be a buyer of the dip in Shopify stock. However, as the environment has turned against such names, I’ll be taking a raincheck on them. Valuation is everything at a time like this.
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