Is Shopify Stock Overvalued?

Is Shopify Stock Overvalued? The Canadian entrepreneurs behind Shopify didn’t set out to create a global e-commerce platform. In fact, at the start, they were simply looking for new ways to connect with customers for their own merchandise.

They started an online snowboard shop Snowdevil in 2004, but soon realized the snowboards weren’t their only opportunity to earn revenue.

By 2006, they determined that demand for a simple, user-friendly e-commerce platform was already high – and they knew it was likely to grow. 

The first version of Shopify’s system launched in 2007, and businesses were quick to sign up. More consumers were open to shopping online, and those with e-commerce systems gained an edge over the competition.

By 2009, more than $100 million worth of sales moved through the Shopify software. In 2011, more than 15,000 stores in 80 countries relied on Shopify to connect with customers. 

That figure has grown exponentially in the near-decade that followed, and stock prices have increased in lockstep.

Today, Shopify shares are quite costly, which has investors questioning next steps. Is Shopify share price overvalued? Will there be a correction? Should they cash profits out now, or is it better to buy? To answer, you have to look at how the company moved from its earliest days to its current state. 

How Shopify Became A Moonshot That Landed

As mentioned, in 2011, Shopify had 15,000 stores on its platform. Just a year later, it was 40,000 stores in 90 countries.

By the end of 2013, it was 80,000 stores with a combined $1.6 billion in sales for the year.

By the end of 2014, more than 100,000 stores were using Shopify to manage online sales, and the company’s market value was roughly $1 billion. 

In 2015, Shopify held its IPO with an offering price of $17 per share. Trading started at $28 per share, and it slowly crept up over the next two years. At the start of 2017, it was well over $46 per share, in early 2018, it was above $100 per share, and when 2019 began, it was hovering around $138 per share. 

This is where things get interesting. Stock prices climbed far more quickly in 2019, hitting $300 per share by July 1st. In early January of 2020, shares were priced above $400 per share, and just before the market crashed, they were at approximately $520.

Analysts weren’t quite sure the gains would last, and then the novel coronavirus hit the market. Everything crashed, including Shopify, which bottomed out around $346.

Since mid-March, Shopify’s share price trajectory has inclined at an astonishing rate. The peak came in August when they reached $1,146.91, before settling down a bit.

As of early September, shares traded at just under $1,000, which has investors wondering which way the company’s fortunes are headed. Is Shopify stock overvalued? Will Shopify stock drop? The answer lies in why it went up to begin with.

Why Shopify Stock Went Up?

Clearly, Shopify was already growing rapidly when the pandemic sent the global economy into a tailspin. However, it was a matter of weeks before the world started to adapt and develop methods of coping with the new circumstances.

In response to quarantines, non-essential business shutdowns, stay-at-home orders, and social distancing, all sorts of company’s ramped up their e-commerce business, and consumers were glad to make the transition.

Of course, that meant good things for Shopify as a leading provider of affordable, user-friendly e-commerce tools. 

A variety of other online service providers saw impressive growth during this period. Companies like the video conferencing platform Zoom (ZM) and home goods store Wayfair (W) benefitted from the sudden, drastic changes in consumer behavior.

Other winners included Netflix (NFLX), Amazon (AMZN), and NVIDIA (NVDA) – an industry leader in the components that make working from home possible. 

Given the reasons behind Shopify’s shocking growth in 2020, some wonder whether the stock is overvalued. Will the momentum continue, or will share prices drop when a vaccine becomes available?

Shopify Financials Explain SHOP Share Price Rise

Considering the strength of Shopify’s second quarter financials, it is no surprise that share prices exploded.

There was a 71 percent increase in new clients from the first quarter to the second quarter – something that is almost unheard of. In a way, the pandemic was a windfall for Shopify, because businesses that were previously hesitant about trying an online storefront had no other choice.

Shopify made the process virtually painless by extending its free trial period, though granted not every trial customer elected to proceed once they had to pay. Nonetheless, plenty did, and more importantly, there was a sharp rise in clients who upgraded to a pricier plan. Today, Shopify supports more than one million merchants located in 175 countries. 

Overall, Shopify saw revenue increase by 97 percent year-over-year. More importantly, the second quarter generated profits of $36 million. That has particular meaning, because Shopify actually lost $28 million during the same period in 2019. 

Seeing that there was no sense in trying to predict how the rest of this unprecedented year will go, Shopify elected not to give any sort of guidance for the remaining two quarters. Investors are left wondering whether the year-to-date results are strictly due to COVID-19. If so, is Shopify overpriced?

Is Shopify Valuation Too High?

Generally speaking, analysts are concerned about Shopify’s valuation, and there is something of a debate in terms of whether or not to buy.

A strong minority are convinced that the company is due for a correction, and when it comes, shareholders who bought at the current highs will lose big.

However, the majority are reasonably confident that Shopify’s progress is more than a pandemic-fueled illusion – though they aren’t ready to declare that the risk of a drop is low. 

With that said, a discounted cash flow forecast analysis of SHOP reveals a fair market value of around $750 per share. That suggests a price higher is above Shopify’s intrinsic value and implies the stock is overvalued.

Will Shopify Stock Drop?

It is certainly possible that Shopify stock prices will drop. In fact, they already have a bit. However, most industry experts agree that the company will continue to grow its financials – at a more reasonable pace – regardless of when the pandemic is officially declared over.

Some clients may choose to close their e-commerce shops once they are fully back in the brick-and-mortar business, but a majority will retain an online presence. Consumers were already moving towards e-commerce – the pandemic just gave that trend a push. 

In other words, Shopify might be a bit overvalued, and there is a chance of a drop. However, it is unlikely that the company will see a dramatic or long-term decline. That means Shopify remains a buy, especially on a pullback.

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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.