Slowing Growth Tempers Recommendation for Shopify
After the onset of the Covid-19 pandemic, cloud-based e-commerce platform Shopify (NYSE:SHOP) entered into a boom phase of epic proportions. As a result, anyone who happened to own SHOP stock enjoyed a spectacular return on his or her investment.
Unlike some other e-commerce companies, Shopify is seller-focused: the company offers software and services to help merchants operate across digital and physical channels. It’s a great business model, as Shopify powers more than 1.7 million businesses around the world.
On the other hand, bigger isn’t always better in the world of investments. As Shopify’s valuation continues to expand, it may become more difficult to justify a long position in SHOP stock.
One prominent analyst expressed concerns along these lines, even to the point of issuing a surprising downgrade. After we peruse through the latest quarterly fiscal data, though, you’ll have to decide for yourself whether it’s time to go shopping with Shopify.
A Closer Look at SHOP Stock
After SHOP stock bottomed out in March of 2020, it embarked upon a rally that could only be described as stunning.
Apparently everybody and his uncle was shopping online during the spread of Covid-19, as Shopify’s valuation just ballooned over the ensuing months.
The first milestone was reached in June of 2020, as the Shopify share price hit $1,000.
A year later, SHOP stock pierced the $1,500 level. In November of 2021, it was threatening to break through $1,750, and possibly $2,000 by the year’s end. With that, Shopify’s market capitalization has expanded to a whopping $213 billion. That might sound massively bullish, but hold your horses for a moment.
Consider that Shopify’s trailing 12-month price-earnings ratio is 62.6. Maybe you’ve seen higher P/E ratios than that, but it’s still rather lofty.
The point is, it’s perfectly fine to take profits on SHOP stock, or to wait for Shopify’s valuation to cool off before taking a position.
Swing and a Miss
Even a red-hot company like Shopify can’t just keep increasing its revenues at the same pace it did in 2020 and early 2021.
Don’t get me wrong. Shopify is still capable of raking in the greenbacks. Indeed, the company generated $1.12 billion in revenues during 2021’s third quarter, up 46% from a year ago.
However, that number is below the Wall Street consensus estimate of $1.15 billion.
Just as importantly, Shopify’s revenue growth is slowing down. The company recorded 57% growth in the previous quarter, and 110% in the quarter before that one.
Moreover, Shopify’s reported third-quarter 2021 adjusted profits of 81 cents per share. That result widely missed Wall Street’s expectation of $1.23 per share.
On top of that, Shopify declined to provide detailed earnings guidance. The company acknowledged that results could be impacted by “supply chain delays or increased costs for materials, labor, shipping or advertising.”
Waiting for Something More Attractive
As you can see, Shopify’s stature as a revenue-generating juggernaut might not be quite as strong as it was during 2020’s e-commerce boom. And if you’re starting to become concerned about Shopify’s valuation, you’re not alone.
In a move that might surprise some investors, Loop Capital analyst Anthony Chukumba just downgraded SHOP stock from a “buy” rating to “hold.” This re-rating is “based on Shopify’s valuation, as opposed to a more bearish view of the company’s fundamentals,” according to Chukumba.
Don’t misunderstand what he’s saying here. Chukumba still sees Shopify as “well positioned for the secular shift to e-commerce.” Furthermore, he remains “impressed by the company’s laser focus on eliminating merchant pain points and continuous innovation.”
That’s a fair assessment. At the same time, Chukumba cautions that Shopify’s current valuation is “in line with our bullish outlook.”
Presumably, he’s suggesting that SHOP stock is already fully valued. Hence, before “becoming more constructive on the stock again,” Chukumba would “await a more attractive entry point.”
I’m not sure what that entry point would be, exactly. It’s probably less than $1,600, though, since that’s Chukumba’s price target now.
The Bottom Line
Some folks won’t care about valuation-related concerns and will argue that Shopify is still growing its revenues. If that’s your position, then feel free to build your position in SHOP stock.
Just be aware that Shopify’s not necessarily keeping up with Wall Street’s expectations, fiscally speaking. And don’t forget that, as the old saying goes, trees don’t grow straight to the heavens.
Or as I’d rather put it, when retail investors go shopping, the share price is bound to start dropping.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
