Shopify Stock Looks Like A Buy At $43

SHOP: Shopify logo

Shopify stock (NYSE: SHOP) has fared relatively well this year, rising by about 22% since early January. The stock also remains up by about 60% from the lows seen in 2022. So, what’s driving the movement in Shopify stock? Shopify’s Q4 2022 results were stronger than expected, with revenue rising 26% with sales rising to $1.7 billion, slightly ahead of consensus estimates. Gross merchandise volume on the Shopify platform also rose 13% to $61 billion, ahead of consensus forecasts. This is commendable, given that the sector at large is facing headwinds, with bellwether Amazon noting that its e-commerce sales contracted by 2% over the same period. Shopify’s earnings also beat estimates standing at $0.07 per share, compared to the consensus which was projecting a small loss. Separately, inflation has also been cooling, with the supply chain snags seen through Covid-19 also easing.  The U.S. Federal Reserve has scaled back on the pace of its interest rate hikes, with the most recent hike standing at 0.25%, down from multiple rate hikes of 0.75% last year. This has also driven up investor interest in high-multiple growth stocks.

That being said, Shopify does face multiple challenges. The company is forecasting slowing revenue growth, amid concerns of a recession. For Q1,  the company projects high-teens percentage growth (implying between 16% and 19%) on a year-over-year basis, and this is also below the consensus estimates. Moreover, Shopify’s operating costs remain high. Although the company cut about 1,000 jobs, or about 10% of its workforce in mid-2022, its overall sales and marketing expenses rose by about 36% over 2022, compared to revenues which rose by just 21%. This could be partly due to high levels of churn within the company’s small business customers who are facing challenges as Covid-19 tailwinds ease and the macroeconomic environment remains tough.

So is Shopify stock a buy at current levels of about $43 per share? Shopify valuation multiples do appear more reasonable versus historical levels, with the stock trading at 8x projected 2023 revenues and about 6.5x 2024 revenues, down from a range of 20x to 40x seen between 2019 and 2021. Moreover, we believe that Shopify’s growth is still likely to remain above the industry average with cost cuts also likely to help its profitability and cash flows going forward. However, the shift toward e-commerce is likely to remain a largely secular trend, and we think 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 titans such as Amazon. We value Shopify stock at about $50 per share, roughly 25% 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 Mar 2023
MTD [1]
YTD [1]
Total [2]
 SHOP Return 3% 22% 890%
 S&P 500 Return 0% 4% 78%
 Trefis Multi-Strategy Portfolio 2% 9% 245%

[1] Month-to-date and year-to-date as of 3/8/2023
[2] Cumulative total returns since the end of 2016

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