Shopify (NYSE: SHOP) exceeded expectations with its fourth-quarter financial results, yet a conservative outlook led to a nearly 17% decline in its shares from the 2024 peak. For those contemplating the recent downturn as an opportunity to incorporate Shopify into their portfolios, here are four key insights to consider about this prominent e-commerce stock.
Shopify’s offerings
Shopify equips individuals in 175 countries with the tools needed to swiftly establish an online storefront and commence product sales. Beyond payment processing and checkout functionalities, the platform provides inventory management, shipping solutions, marketing tools, and the flexibility to sell across various channels. Furthermore, Shopify boasts a developer ecosystem and app store, empowering merchants to tailor the platform to their specific requirements.
In 2023, the platform facilitated $235.9 billion in gross merchandise volume, reflecting a 20% year-over-year increase. Revenue for the same period reached $7.1 billion, primarily derived from merchant and subscription solutions.
Right-sizing operations
In 2022, Shopify made a significant move by acquiring Deliverr for $2.1 billion, aiming to enhance its capabilities akin to Amazon. The strategic goal was to establish a robust distribution and logistics foundation, providing millions of customers with reliable shipping services. This involved substantial capital expenditures, with the intention to monetize them over time through recurring fees as the delivery services gained traction.
However, in a strategic shift last year, Shopify decided to divest its entire fulfillment segment. As part of this move, the company increased its stake in Flexport, which is set to become its logistics partner. This strategic pivot appears well-considered, allowing Shopify to concentrate on its core strengths: delivering innovative software and technological features that add value for its merchants.
Moreover, this decision frees up capital, contributing to the company’s journey toward profitability. In 2023, Shopify achieved $132 million in net income. Analyst estimates further predict a robust 35% annualized growth in adjusted earnings per share over the next three years.
Sensitivity to macro forces
On one hand, Shopify has experienced remarkable growth by capitalizing on the enduring trend of online shopping. Its success is attributed to a scalable software-as-a-service (SaaS) and cloud-based platform, positioning it as a true tech enterprise capable of rapid expansion.
Yet, it’s crucial to acknowledge that Shopify is not immune to macroeconomic influences. The company has faced a substantial slowdown in growth over the past few years, coinciding with periods of higher interest rates, inflationary pressures, and concerns about an economic downturn.
To its credit, Shopify has actively sought to attract larger merchants to its platform, signaling a strategic shift. Nevertheless, the company still caters to small- and medium-sized merchants, whose fortunes are intricately tied to the broader economic landscape. In the event of an economic downturn, the vulnerability of these businesses increases, potentially impacting Shopify’s financial performance in a negative manner.
Lofty expectations
Undoubtedly, Shopify stands out as one of the top-performing stocks in recent memory, albeit amidst considerable volatility. Currently trading at 55% below its all-time high, the stock has delivered impressive returns.
However, it’s essential to note that Shopify remains a notably expensive investment. With a current price-to-sales (P/S) ratio of 13.9, the valuation is considerably higher compared to other players in the e-commerce sector, including Amazon, MercadoLibre, Etsy, and eBay. Although Shopify’s P/S ratio is below its historical average of 22.6, it still reflects a substantial valuation, even when factoring in the business’s growth potential.
