At $350, There’s Upside For Shopify Stock

SHOP: Shopify logo
SHOP
Shopify

Shopify stock (NYSE: SHOP) has plummeted by around 75% year-to-date falling to about $353 per share, as the post-Covid-19 reopening of physical stores takes a toll on revenue growth for the company’s e-commerce software and services. Over Q1 2022, Shopify’s revenue grew by about 22% year-over-year to $1.2 billion, marking the slowest pace of growth the company has seen since it went public. Shopify’s earnings also came in well below estimates, at just about $0.20 a share during Q1, which was well below estimates of over $0.50 per share. Moreover, despite slowing revenue growth, Shopify has big plans to bolster spending to expand its fulfillment network, a move that will hurt profitability and cash flows in the near term. Earlier this month, the company also said that it would acquire fulfillment technology provider Deliverr in a largely cash-based deal valued at about $2.1 billion. The deals and investment plans might be badly timed from an investor perspective, as the markets have been increasingly prioritizing cash flows and margins, amid surging inflation and rising interest rates.  Moreover, there are also concerns about whether Shopify will be truly successful with fulfillment, as it diversifies from its lucrative software business and whether it will be able to truly take on e-commerce behemoth Amazon, which has a deeply entrenched fulfillment network.

Now, although there are clearly some headwinds for Shopify in the near term, we think the risk to reward positioning for the stock looks more compelling than it has in a long time. The stock remains down by about 80% from its all-time highs and now trades at levels last seen in 2019, before the Covid-19 pandemic. The stock currently trades at just over 6x projected 2022 revenue, down from a range of 20x to 40x seen between 2019 and 2021. However, Shopify has actually made considerable progress since then. For perspective, its customer base has risen 2x from pre-pandemic levels and gross merchandise value (GMV) for 2021 stood at a little over $175 billion, making it almost half as large as Amazon’s marketplace. Also, it’s not like Shopify will stop growing. Consensus estimates point to around 30% revenue growth this year. The long-term opportunity in the e-commerce market is sizable and Shopify has a proven track record of e-commerce innovation. Global retail e-commerce sales are on track to rise from around $4.92 trillion in 2021 to about $7.4 trillion in 2025, per forecasts from eMarketer [1].  Shopify will remain a prime beneficiary of this growth, as it provides the go-to product suite of software and analytics tools for businesses that want to go online without having to bank on platform players like Amazon, which are perceived as competing with vendors who use their platforms.

We value Shopify stock at about $600 per share, roughly 90% ahead of the current market price.  See Shopify Valuation: Is SHOP Stock Expensive Or Cheap? for more details on Shopify’s valuation and Shopify Revenue for more details on the company’s revenue streams and how they are trending.

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Returns May 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 SHOP Return -17% -74% 725%
 S&P 500 Return -5% -18% 76%
 Trefis Multi-Strategy Portfolio -8% -23% 202%

[1] Month-to-date and year-to-date as of 5/13/2022
[2] Cumulative total returns since the end of 2016

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Notes:
  1. eMarketer []