Down 80% From Record Highs, Is Shopify Stock a Buy?

After a stellar run since March 2020, several e-commerce stocks have lost significant momentum in the last six months. For example, shares of Shopify (NYSE: SHOP) surged from $350 at the end of March 2020 to a record-high of $1,763 in November 2021. SHOP stock is currently trading at $348, which means it's available at pre-pandemic prices.

While Shopify stock is down 80% from all-time highs, the Canada-based e-commerce company has delivered stellar returns to long-term investors. The company went public in May 2015 and has since returned a staggering 1,260% to shareholders. In this period, the S&P 500 index has returned 108%.

Let's see if Shopify should be part of your shopping list right now.

The bull case for Shopify

The COVID-19 pandemic acted as a massive tailwind for Shopify as global lockdowns forced small and medium companies to establish an online presence. As a result, Shopify's sales grew from $1.07 billion in 2018 to $4.6 billion in 2021. While revenue growth is expected to decelerate in 2022, analysts expect the company to increase its top line by a healthy 27% year-over-year.

Shopify enjoys significant pricing power as its GMV, or gross merchandise volume, has been up at an annual rate of 57% in the last two years, while sales have increased by 60% in this period. The GMV is the total amount of transactions conducted on the Shopify platform.

Due to the sell-off in Shopify stock, the company is now valued at a market cap of $45.8 billion. So, Shopify is trading at 8x forward sales, its cheapest multiple in the last six years.

Additionally, Shopify disclosed it would split its shares in a 10:1 ratio, improving its liquidity and demand among retail investors. A stock split generally acts as a positive catalyst for a company's stock price.

While e-commerce stocks have been hammered in the last year, the shift towards a digital economy will gain pace in the upcoming decade. A report from e-Marketer forecasts online retail sales to touch $6.17 trillion by 2023 from $5.55 trillion in 2022, providing Shopify enough room to expand its revenue going forward.

The bear case for Shopify

Yes, Shopify is available at a discount compared to historical valuations. But it continues to trade at a premium compared to peers and the broader markets. Further, investor sentiment remains bearish and is expected to weigh heavily on SHOP stock in the near term.

Shopify's sales and marketing expenses rose 63% in Q1, while research and development expenditures increased by 72.6% year-over-year, compared to revenue growth of 21.7%. Due to rising operating costs, the company posted an operating loss of $98 million in the March quarter.

Shopify also disclosed it would ramp up investments to expand its fulfillment center capabilities, negatively impacting its profit margins. In fact, analysts expect Shopify's adjusted earnings to decline by 81% year-over-year to $1.21 per share, valuing the stock at 287x forward earnings which is sky-high.

So, should I buy Shopify stock?

There is a good chance for Shopify shares to move lower in 2022, given challenging macroeconomic conditions. Last week the equity markets experienced another round of sell-offs as inflation figures rose to 40-year highs. The prospect of rising commodity prices, multiple interest rate hikes, and compressed corporate earnings may lead to a decline in SHOP stock.

Alternatively, investors have the opportunity to buy a quality stock at a lower valuation. As it's impossible to time the market, every significant dip in stock prices should be viewed as a buying opportunity for long-term investors. Analysts remain bullish on Shopify and expect shares to more than double in the next 12 months.

Quickfire round

Does Shopify pay a dividend?

No, Shopify stock does not pay investors a dividend.

Why is Shopify stock dropping?

Shopify's steep valuation and a weak macro environment have driven its shares lower.

What is Shopify's market cap?

Shopify is valued at a market cap of $45.9 billion.