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Who’s Right About Shopify Stock? The Bulls vs. the Bears

The most convincing argument against Shopify stock is its high valuation

Shopify stock - Who’s Right About Shopify Stock? The Bulls vs. the Bears

Source: Shopify via Flickr

It’s been a bumpy summer so far for e-commerce company Shopify (NYSE:SHOP) as bulls and bears have clashed over whether the company is headed off a cliff or into the stratosphere. It’s rare to find an investment quite as polarizing as Shopify stock, and the opposing views make it difficult to decide which way to sway. Here’s a look at both sides of the argument on Shopify stock.

Argument: Business Model

Perhaps the most controversial topic when it comes to Shopify is whether the company operates a worthwhile software-as-a-service business. Citron Research has criticized SHOP’s business model saying it’s no more than a mid-level marketing program (MLM) and doesn’t deserve the kind of praise it’s gotten.

To some extent, Citron has a point. Shopify makes it possible for small businesses to grow their business via the internet, but it also opens the e-commerce space to individuals who think they can simply open a Shopify storefront and make millions. From that perspective, Shopify is essentially luring in thousands of people who will sign up and give up — not a very sustainable business model. 

Shopify’s business does have some element of that high turnover rate, but the company also has another side to its business which includes larger partners and merchant solutions.

Shopify has expanded its offerings to include back-end assistance like inventory management, payment processing, and shipping. One of the largest benefits for small-business owners using Shopify is that all of their business needs are in one place on one platform. 

There’s no question that SHOP’s back-end merchant solutions is a valuable arm of the business. And while it may not be what you think of first when you hear the name Shopify, it makes up more than half the company’s total revenue.

Winner: The Bulls

Argument: High Price Tag

Another big reason investors are leery of Shopify stock is the company’s price tag. It definitely doesn’t qualify as a bargain buy trading at 991 times its forecast earnings. To put that into perspective, (NASDAQ:AMZN) trades at just 146 times its forecast earnings.

Right now investors are paying 23 times the company’s sales. This is a huge leap of faith considering most of the company’s peers are going for less than 10 time sales. 

Bulls say that Shopify’s growth story supports its sky-high valuation. After all, revenue rose 68% during the first quarter, and profits rose a staggering 71% from the year-ago quarter. 

However, it’s also important to note that the firm isn’t profitable yet. It posted a $15.9-million GAAP operating loss during the first quarter.

Yes, SHOP looks to be capable of delivering impressive growth. But is it impressive enough to sustain its lofty valuation? I don’t think so. Buying at these levels is risky for any stock, let alone a relatively young tech stock like SHOP.

Winner: Bears

Argument: E-Commerce Shifts Will Hurt Shopify’s Business

Another huge factor that weighed on Shopify stock earlier this summer was worries about changes in e-commerce and how they will affect Shopify’s overall value proposition.

One of the biggest draws for SHOP is the fact that the company is linked with e-commerce heavy hitters like Facebook (NASDAQ:FB) and Amazon. If something were to disrupt those relationships, it would be a massive blow to the value Shopify provides its merchants. 

Right now Facebook is in the process of reworking its advertising policies in an effort to assuage users’ concerns about data usage. The social media site is looking to clamp down on the types of advertisers allowed leverage user data in order to target potential customers.

What that likely means is that smaller, lower-quality advertisers — like many of SHOP’s users — might not be able to advertise on Facebook much longer. 

Plus, a recent Supreme Court decision has changed the way online retailers will be taxed. Individual states will now have the power to collect sales tax from e-commerce companies. Those costs are likely to be passed on to consumers, which could in turn put them off online shopping.

That would hurt Shopify stock because a slowdown in digital retail would hurt the company’s growth potential.

So, are these huge issues for SHOP? Yes and no. Bulls will say that the Supreme Court ruling is unlikely to have much of an impact on e-commerce growth, and I’d tend to agree.

While the draw of shopping online was initially based on lower prices, people are gravitating toward online shopping now because of convenience. Low prices are becoming an increasingly smaller part of the e-commerce equation, so I don’t think the tax shift will have much of an impact on the industry as a whole.

As for the Facebook worries, I’d say that’s a larger problem for Shopify investors. The platform’s relationships with big names like AMZN and FB are a huge part of why merchants sign up and renew their subscriptions. Without those connections, it’s very unlikely that SHOP will be able to continue growing its business at the same pace.

Winner: Tie

Bottom Line on Shopify Stock

While I’d agree that a lot of Shopify’s success is highly dependent on the company’s ability to maintain its ties with FB and AMZN, I think the most convincing argument against SHOP stock is its valuation.

I simply don’t see how those figures can be supported, even if the bulls are considered winners in the other two arguments. If you’re a Shopify believer, you might want to wait for another pullback before taking a position because its current valuation looks risky. 

As of this writing, Laura Hoy was long AMZN and FB.

Article printed from InvestorPlace Media,

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