How High Will Shopify Stock Go?

How High Will Shopify Stock Go? Shopify Inc (NYSE:SHOP) had a banner year in 2020, growing from a low of around $350 to well over $1,000 per share. At a time when a lot of businesses were forced to go online to survive, ecommerce platforms with a pre-built infrastructure like Shopify were favored.

There are legitimate reasons to be concerned now though. Big companies like Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL) are solidifying their offerings to stunt Shopify’s growth. And as the economy reopens the migration of capital from online e-commerce storefronts to brick and mortar shops could pull transaction dollars away from Shopify.

These woes are in addition to competitive threats from WordPress, Bigcommerce Holdings Inc. (NASDAQ:BIGC), Wix.com Ltd (NASDAQ:WIX), Squarespace, and Cloudflare Inc (NYSE:NET).

It’s not all doom and gloom however. Shopify still has major partners like Pinterest Inc (NYSE:PINS), Facebook, Inc. (NASDAQ:FB), Walmart Inc (NYSE:WMT) and TikTok on board. These partnerships drive recurring revenue that give the company a solid foundation to build a scalable business.

For investors is it time to ring the register or use weakness to load up on Shopify?

Why Shopify Customers Are Sticky

Shopify is an all-in-one ecommerce platform used by businesses wanting to run an online store. It acts as a host and provides different themes that control your store’s layout. There’s a mix of free and paid themes that can be modified to suit your individual business needs.

On top of that, the platform offers payment processing, so you can accept and receive payments directly on site.

Even small businesses can benefit from Shopify’s vertically integrated offerings through its Oberlo subsidiary. This drop-shipping app lets you select from millions of products to get your digital storefront online with no upfront inventory costs. This is a great option for entrepreneurs and solopreneurs to get set up and open for business the same day.

Because it offers out-the-box and customizable solutions, Shopify has been adopted by a wide variety of businesses both big and small. It competes with major web hosting solutions and can easily connect to back-end CRM solutions like Salesforce or email solutions like Mailchimp.

With so much to offer, it’s no wonder Shopify is a leading digital business solution. But are Shopify sales growing?

Stellar Top Line Growth Rates Continue

Shopify experienced a big boost in sales over this past year or so. The company’s full-year 2020 revenue total was $2.92 billion, which is an increase of 86 percent from the prior year.

Merchant solutions drove the bulk of the growth, with a 116-percent, year-over-year revenue increase of 116 percent. The company earned $2.02 billion in that segment alone, while Subscription Solutions revenue brought in $908.8 million for a 41 percent increase over the prior year.

As a merchant-serving company, the company continues pushing free trials and other initiatives to help onboard more clients. It also launched a Shopify POS to help meet brick-and-mortar commerce needs. This was a sign of Shopify’s ambitions to expand from online to offline and reach a new customer base.

Shopify is also boosting discovery features and continues to seek partnerships and integrations, like its launch of Alipay to provide Chinese users with a seamless payment option.

Management’s vertical and horizontal integration initiatives across geographical boundaries, should help the company to further boost revenues as the pandemic fades further into the rearview mirror. 

Will Shopify Earnings Go Up?

The company’s operating income for the year was $90.2 million versus an operating loss of $141.1 million the prior year. And that put net income at $491.3 million, or $3.98 earnings per diluted share. That compares to 2019’s adjusted net income of $34.3 million, which equates to $0.30 per diluted share.

Generally as revenues pop we see Shopify earnings rise in lock step also. During acquisitive periods the earnings will suffer but for the most part over the coming year the trend is higher.

Investors have to be aware of the seasonality component to Shopify’s revenues and earnings which can create the appearance of spikiness from one quarter to another. Year over year comparisons are what count most.

So far so good as far as investors are concerned; Shopify is growing earnings and the future looks bright. Gross profit in 2020 was $1.56 billion. That’s a 78 percent increase from 2019’s $865.6 million haul.

So, with earnings and income growing, is the company undervalued?

Is Shopify Stock Undervalued?

At first glance it’s a stretch to say Shopify is undervalued. The company trades at over 86 times its 12-month earnings and has a market capitalization of over $137 billion. However, Shopify has outperformed the S&P 500 benchmark for a considerable time period, and more importantly a discounted cash flow forecast analysis reveals a fair market price per share of $1,483, suggesting serious upside.

Although it has a difficult time growing, it could be better positioned than some of the competition. The company’s out-the-box approach and SaaS business model drives strong revenue growth. And the odds are the tailwinds that have sparked growth in the past 5 years will continue for the next 5 as more businesses recognize how imperative a strong online presence is.

In the short-term the risk of a slowdown is very real though. As the economy reopens, consumers will likely start to visit physical stores more often. And there’s going to be less money being spent once government stimulus funds dry out. That should surely cause a drop in overall consumer spending.

That’s just the tip of the iceberg of risks to investing in this ecommerce darling.

Risks to Buying Shopify Stock

There’s a huge elephant in the ecommerce space called Amazon that Shopify must contend with. The ecommerce giant continues dominating and building its own on-platform sales. There are more Amazon Prime members than not in the U.S., and even giants like Walmart are hard-pressed to compete with its expansive footprint.

As Amazon puts more brick-and-mortar stores out of business, it is effectively diminishing the pool of customers that Shopify targets. It’s a race between the two as a result. If Shopify can onboard and drive online sales for companies that would otherwise face closure they can potentially sidestep the threat from Amazon. 

For now, analysts believe the e-commerce sector could be overpriced. The industry’s sell off is what defined its 2021, and Shopify could be anchored to let fundamentals catch up with price.

How High Will Shopify Stock Go? Conclusion

Shopify is a major player in ecommerce. The platform is a vertically integrated, out-the-box solution that can also be customized to fit most business needs. When the pandemic hit, the company saw a big boost in sales corresponding with widespread stay-at-home orders.

But the economy is reopening, and e-commerce is feeling the pinch. People are itching to go outside to visit brick-and-mortar stores, pulling capital away from Shopify. Technology stocks sold off in the first half of the year, and there’s a lot of competition on the horizon. 

Nevertheless, the fundamentals look strong and the upside for Shopify is as high as $1,483 based on a DCF analysis of cash flows.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.