Does Pact With Amazon Make Shopify Stock A Buy?

SHOP: Shopify logo
SHOP
Shopify

Shopify stock (NYSE: SHOP) gained about 10% over the past month and remains up by over 80% this year. This is well ahead of the Nasdaq-100, which remains up by 42%.  There have been a couple of positive developments for the stock of late. For one, late last month, Shopify launched Amazon’s Buy With Prime option. The deal will allow Shopify vendors to offer delivery options that use Amazon’s fulfillment network on their storefront while checking out using their Amazon accounts. This removes a potential risk for Shopify, as Amazon has been looking to monetize merchants from third-party platforms by extending its services such asWhile Shopify vendors could independently add this support previously, it is now officially endorsed by Shopify, potentially meaning that Shopify will get some commissions from transactions. Shopify also posted a better-than-expected set of Q2 results last month. Revenue grew by 31% year-over-year to $1.7 billion, with adjusted earnings coming in at $0.14 per share, compared to a loss in the year-ago quarter, driven by lower adjusted operating expenses. The company’s profitability could continue to look up following the divestment of its logistics business, with gross margins for Q3 projected to be about 2% to 3% above the 49.3% recorded in the second quarter due to the sale of the company’s logistics business.

Interestingly, Shopify has had a Sharpe Ratio of 0.9 since early 2017, ahead of the 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

So, is Shopify stock a buy at current levels of about $63 per share? While Shopify valuation multiples are lower versus historical levels, with the stock trading at about 11x projected 2023 revenues, down from a range of 20x to 40x seen between 2019 and 2021, the multiple is still a bit high. That said, we think that Shopify’s revenue growth is still likely to remain above the industry average, as the company looks to expand beyond its core base of smaller customers to more large sellers and enterprises. Shopify is also looking to improve its margins further via cost cuts and manpower reductions. Shopify’s decision in early May to abandon a plan to build out a fulfillment business is also a big positive from a cash flow and risk perspective. We value Shopify stock at $70 per share, roughly 10% ahead of the current market price. See Shopify Valuation: Is SHOP Stock Expensive Or Cheap? for more details on Shopify’s valuation and Shopify Revenues for more details on the company’s revenue streams and how they are trending.

Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 SHOP Return -5% 83% 1379%
 S&P 500 Return 0% 17% 101%
 Trefis Reinforced Value Portfolio -2% 29% 564%
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[1] Month-to-date and year-to-date as of 9/15/2023
[2] Cumulative total returns since the end of 2016