Shopify (NYSE:SHOP) has had a phenomenal year, rising by 105%, and outpacing the S&P 500 by over 5x in less than 11 months.
With the share price up so substantially, the opportunity for new investors may be muted, at least in the eyes of some. However, another school of thought is that the rally is just getting started, and a significant return can yet be generated. Which of the two viewpoint is right? Is it too late to buy Shopify stock?
5 Reasons Why Shopify Is a Buy
For consumers, the process of shopping online has made it as easy as one-click on sites like Amazon. But to get to the point where inventory is displayed, managed, distributed and payments taken so easily is a feat of extraordinary engineering and management.
In so many of these areas, Shopify shines brightly. For example, it has developed sophisticated tools to combat fraud, a major concern for e-commerce stores. Not only does Shopify protect its merchants well in this regard but it also builds consumer trust in the platform and ultimately that leads to repeat purchases, and higher customer lifetime value.
Speaking of merchants, Shopify has executed extraordinarily well in building a diverse merchant base of 1.75 million that is highly inclusive. The company doesn’t just onboard large retailers but has a long-tail of small and independent businesses on its platform too. By so doing, SHOP shareholders can be confident that revenues are more diversified and no single customer can disproportionately impact its financials.
Another key attribute that has led to Shopify’s success is its fulfillment network that, like Amazon, focuses on fast and affordable shipping options to increase satisfactions among merchants’ end customers.
Those same merchants can take advantage of Shopify’s integration with social media platforms, such as Instagram and Facebook. It’s even possible for them to sell directly through these channels. As social commerce grows, Shopify and its merchants are poised to benefit too.
The growth of the platform within the domestic US was so significant that the company expanded its global footprint. This international expansion opens up new markets and growth opportunities that will further boost its user base and revenue streams.
What Most Investors Miss
Most Shopify investors see the big picture but few know that, deep under the hood, the company provides financing to merchants via Shopify Capital, a critical growth lever to help them expand. This has the added benefit of diversifying its revenue streams.
Another little-known but highly valuable aspect of Shopify’s business model is its competence in data analytics and machine learning for personalized shopping experiences. These technologies tend to boost customer engagement and loyalty, and ultimately result in higher sales for merchants.
In addition, Shopify is much more than a standalone platform for facilitating offline stores to sell online. It has an extensive app ecosystem that offers a range of tools and integrations, which collectively enable merchants to customize their stores extensively, improve functionality and increase sales.
Lastly, management has a keen eye on the rise of mobile and has emphasized mobile-friendly offerings. This mobile-first approach is expected to be a crucial growth driver, particularly as the firm expands internationally where phone usage is so high.
With all that said, what does the future hold for Shopify stock?
Is It Too Late To Buy Shopify Stock?
On a positive note, revenue growth has been accelerating in recent quarters. The last four quarters alone have posted numbers of 25.7%, 25.2%, 30.8%, and 25.5% versus their year-ago quarters.
Another bullish sign is how rich the balance sheet is, currently perched with a cash level of $1.2 billion plus $3.6 billion in short-term investments versus a comparatively paltry $915 million in long-term debt.
In addition, 26 analysts have revised their estimates higher for the next quarter, suggesting a materially positive change in sentiment.
That being said, is it too late to buy Shopify stock? According to analysts, it is too late to buy Shopify stock because it could fall to the consensus price target of $68.25 per share, suggesting 8.7% downside risk.
It’s worth highlighting that a discounted cash flow forecast analysis is $53.68 per share, meaning as much as a 26.8% decline is on the horizon.
Indeed on a technical level, Shopify stock is somewhat overbought at this point in time, so both fundamentally and technically the risks to shareholders are elevated right now.
Shopify has had an impressive revenue growth streak over the past year, as well as over the past three years, but its profitability has been much more choppy, oscillating from highly positive to very negative across the many quarters.
Those swings have led to tremendous share price volatility. At times, they have been a real boon to shareholders, for example, over the past year when the share price more than doubled.
At other times, it’s led to crushing declines, so the stock is a better fit for those who can handle the stomach-churning undulations than those who are seeking a steady-eddie stock.
Having run up so much year-to-date, fair value and a DCF forecast both peg fair value at considerably lower levels. As such, it seems too late to buy Shopify if investors want a reasonable margin of safety, or in other words an attractive reward to risk payoff.
Bears have very solid arguments to suggest the time to buy is later when the share price has returned from overbought levels and the fundamentals come back in line with intrinsic value.
No doubt, Shopify is a phenomenal business with a laundry list of reasons to buy it, but timing is crucial to returns, and for now the patient investor may be rewarded by sitting on the sidelines, which as always is among the hardest of strategies to execute.
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.