Increasing 2x In 2023, What Is Next For Shopify Stock?

Shopify stock (NYSE: SHOP) had a solid year, rising by almost 100% since early January and is up by 16% over the past month. This is well ahead of the Nasdaq-100, which remains up by 50% over the same period.  Demand for Shopify’s myriad offerings, which range from software tools businesses need to set up their e-commerce websites, to payment processing and point-of-sales terminals, has been on the uptrend over the last year. For perspective, over the most recent quarter, revenue increased by 25%, and gross profit grew by 36%, while gross merchandise volume (GMV) transacted on the company’s platforms was up 22% year over year to $56.2 billion. The company could also be set up for a strong Holiday season, if the Black Friday-Cyber Monday is any indicator, given that sales over this period rose 24% compared to a year ago.

There have been other positive developments as well. Earlier this year, Shopify exited its fledgling logistics business, which it began building out pre-Covid, selling its operations to global supply chain player Flexport. This divestment has also been viewed favorably by the markets, given that sizable cash outlays were required for Shopify to build out what is seen as a low-margin business. The company has also been cutting costs, reducing its workforce by 20% earlier this year. Shopify has also had some notable collaborations, including the integration of 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.

SHOP stock has suffered a sharp decline of 35% from levels of $115 in early January 2021 to around $75 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the decrease in SHOP stock has been far from consistent. Returns for the stock were 22% in 2021, -75% in 2022, and 109% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 21% in 2023 (YTD) – indicating that SHOP underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; and even for the megacap stars GOOG, TSLA, and MSFT.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could SHOP face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

We think that Shopify stock has some upside. The company says that it now accounts for about 10% of all U.S. e-commerce transactions, and we believe that revenue growth is still likely to remain above the industry average for a couple of reasons. Firstly, the company looks to expand beyond its core base of smaller customers to more large sellers and enterprises with its large business-focused Shopify Plus product. This offering could be attractive from a cost standpoint for larger businesses, as they can get cutting-edge technology and support without the hassle of building out their own software and development teams. Shopify is also making solid progress with its offline business and point-of-sale operations, noting that this business is growing by 1.5x its other business, with sales projected to touch $450 million this year. Separately, Shopify is also looking to improve its margins further via cost cuts and manpower reductions. Shopify valuation multiples are lower than historical levels, with the stock trading at about 10x projected 2023 revenues, down from 20x to 40x seen between 2019 and 2021. We value Shopify stock at $80 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.

[1] Month-to-date and year-to-date as of 12/13/2023
[2] Cumulative total returns since the end of 2016

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