Shopify: Time for Enthusiasm or for Caution?

·4 min read

For investors in Shopify (SHOP), growth is everything. Indeed, this ecommerce platform provider rode the online shopping wave in incredible fashion in recent years. During the pandemic, at a time when many investors were worried about SMBs closing and Shopify experiencing some serious churn, the opposite happened. More and more small and medium-sized businesses decided to open up shop, online.

Additional moves to cut fees on the first $1 million produced by Shopify’s customers have accelerated this growth. As has the company’s move into payment processing, order fulfilment, and other verticals. Shopify is now a company that’s not only growing its top line at light speed, it’s also becoming increasingly profitable. (See Shopify stock charts on TipRanks)

The question many investors have is whether this company’s growth rate will eventually slow over time, or if there’s potential for Shopify’s growth to accelerate from here.

Let’s dive in.

Recent Earnings Highlight Strength of Core Business

Anticipation around Shopify’s most recent earnings release took this stock once again to a new all-time high. However, in the days since, shares of SHOP stock have given up some of their gains, which is unsurprising to most investors, considering how far this stock has run in recent months.

That said, Shopify’s earnings provided something to be excited about. In the first quarter of the year, a quarter which is typically slow for Shopify, the company brought in $1.1 billion in revenue. This number was 57% higher on a year-over-year basis.

Among the highlights for Shopify shareholders was the acceleration seen in terms of monthly recurring revenue growth. Growth in this segment hit 67%, due to increased merchant additions and POS Pro subscriptions. Of the $95 million in monthly recurring revenue, Shopify Plus contributed $25 million, or more than a quarter of this segment. This is key to investors who are bullish on Shopify from a long-term standpoint. They cite this recurring revenue growth as a key long-term driver of profitability for this platform.

On the bottom line, Shopify showed gross profit growth of 66%, and astronomical net income growth of more than 2,300%. This growth was seen from a relatively low base ($36 million last year compared to $879 million this year), but that’s a whopping difference.

Shopify ended the quarter with ample liquidity, boasting cash and cash equivalents of $7.8 billion. This position increased substantially year-over-year, largely due to cash from continuing operations.

These numbers are simply stellar. Finding a company with this kind of growth rate in this market is difficult, to say the least. Given Shopify’s size, and its ability to scale its existing platform to this level, it appears investors are continuing to price in very aggressive growth estimates into this stock.

Here’s where it gets interesting.

Can SHOP Stock Grow Into its Valuation?

Tremendous growth is a great thing, and SHOP stock certainly has a tremendous amount of growth baked into the company’s current valuation. This is where a divergence among some investors with respect to SHOP stock comes into play.

Currently, Shopify is valued at approximately 226x forward earnings and 40x forward sales. That’s not high, that’s astronomical compared to the sector median and even the highest-growth companies in the market.

However, Shopify’s consistent earnings beats have proven that the bar simply can’t get raised high enough for this stock. Accordingly, Wall Street and investors everywhere appear to be content with getting ahead of the future earnings of this company, before the price grows out of reach.

The extent to which Shopify can grow into its valuation is really the decision investors need to make with this company.

What Analysts are Saying About SHOP Stock

According to TipRanks’ analyst rating consensus, SHOP stock comes in as a Moderate Buy. Out of 26 analyst ratings, there are 16 Buy recommendations and 10 Hold recommendations.

SHOP stock price prediction
SHOP stock price prediction

As for price targets, the average Shopify price target is $1,734.74. Analyst price targets range from a low of $1,450 per share to a high of $2,000 per share.

Bottom Line

Shopify’s impressive international expansion plans, and its movement into various profit-creating verticals, have impressed even the most skeptical bears. Accordingly, Shopify appears to be one of the most difficult (if not impossible) companies to short in the market.

Even those wary of Shopify’s valuation have to admire how fast the company has been able to grow, and to consistently vault over an ever-increasing bar.

Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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