Shopify Inc (US) (NYSE:SHOP) is at the forefront of a revolution. Many will remember the classic Macintosh commercial from Apple Inc. (NASDAQ:AAPL) in 1984 that introduced the first iteration of the Mac as a revolutionary product. In a world where Amazon.com, Inc. (NASDAQ:AMZN) is the entity that draws the attention of the minions, Shopify is the proverbial sledgehammer blowing up the screen.
Shopify is the anti-Amazon.
Where Amazon allows sales on a platform operated by them, SHOP’s platform allows small- and medium-sized businesses to operate their e-commerce site.
According to the last earnings report, about 500,000 businesses run their e-commerce sites on a Shopify platform. That’s approximately double the level from the fourth quarter of 2015. The company estimates the size of their target market at 47 million businesses, hence Shopify has barely scratched the surface of its potential market.
So successful is SHOP’s platform that it has affected and attracted customers away from sites such as Etsy Inc (NASDAQ:ETSY) and eBay Inc (NASDAQ:EBAY). However, the biggest coup was persuading Amazon itself to cede small business e-commerce to Shopify. Amazon initially launched Webstore as a competitor to Shopify. After failing with Webstore, Amazon even went on to partner with Shopify to migrate its competing Webstore product to the company’s platform.
SHOP Stock: Competitors Lack a Key Offering
Although Shopify currently ranks third in market share, it also performs well versus its competition. The No. 1 platform is Magento. However, Magento is open-source, while it is free to use, it is not hosted or managed, which makes it difficult to operate for non-tech-savvy users.
The second most popular platform is WooCommerce, which is also open-source. Like Magento, WooCommerce requires small business owners to devote more time to set up and maintain. Hence, it’s hard to see how Magento and WooCommerce can hold onto its successful e-commerce customers. Unless small business owners want to spend time on site maintenance, most will spend a little more money for the convenience of the Shopify platform.
Shopify Stock’s Pricey Valuation
The difficult part of buying SHOP stock is timing and the fact that its growth is already priced into the stock. Financial metrics offer little reason to buy the stock; most analysts predict the company will become profitable by 2019, some sooner.
However, the current profit projection of 20 cents per share in 2019 gives Shopify stock a price-to-earnings ratio (P/E) of almost 500x. The price-to-sales ratio fares little better at 18, more than eight times the S&P 500 average. The only number supporting the buy case is the revenue growth number. This number shows revenues are almost doubling every year.
Bottom Line on Shopify
Despite the high ratios, one metric that’s become more favorable lately is the price. The SHOP stock price is now in the high $90s per share. This is down over 20% from all-time high of $123.94 last month. The stock began falling when Citron Research’s Andrew Left, a famed short-seller, alleged that most of the reported 500,000 clients are not serious businesses. Shopify disputes this claim, although the stock has continued falling.
It’s not yet clear whether Shopify stock has established a near-term low; nonetheless, the falling price provides a reason to watch the stock for a good entry point.
And the stock has plenty of room to grow. The drop in the SHOP stock price has also taken the market capitalization below $10 billion. This lags well behind Amazon’s market capitalization of over $475 billion.
One cannot predict that Shopify’s market cap will catch Amazon’s. But if the company maintains revenue growth, the stock’s growth can close much of this gap.
SHOP’s platform is revolutionizing small businesses by providing a full-service platform for e-commerce. Although SHOP stock appears too expensive from a fundamentals standpoint, the growth potential appears too large to ignore.
The company has scored successes against Amazon, eBay and Etsy. Also, its platform’s ease of use also offers advantages over larger players such as Magento and WooCommerce. Given all these factors, it is likely both small business owners and stock investors will flock to Shopify.
As of this writing, Will Healy did not own a position in any of the stocks mentioned here.