After retreating in September, Shopify (NYSE:SHOP) stock has found support at the $300 price level. SHOP stock suffered a small haircut after its third-quarter earnings miss on Oct. 29.
But last quarter’s results were not particularly bad. While its growth has slowed from prior quarters, SHOP is continuing to expand at a 40%+ clip.
Much of this growth, though, is built into the price of Shopify stock, whose valuation remains sky-high. With this in mind, is SHOP stock worth buying today?
Over the long-term, buying Shopify stock now could be a smart move. But, at some point in the future, it may be possible to buy the shares at a lower price.’
SHOP’s Recent Earnings
As mentioned above, SHOP this week released its Q3 earnings. Its revenue was $390.6 million, a 45% year-over-year jump. As more merchants join the platform, the company’s Monthly Recurring Revenue (MRR) continues to climb, and its subscription revenues were up 37% YoY.
But its fasting growing revenue segment is Merchant Solutions.
With the company’s Gross Merchandise Volume (GMV) skyrocketing to $14.8 billion, its Merchant Solutions revenue grew 50% YoY. However, the company continues to generate operating losses. Its Q3 operating loss was $35.9 million, slightly above its $31.4 million loss a year earlier.
A big reason for SHOP’s earnings miss was its tax provision of $48.3 million. For the full-year 2019, the company projects revenues of around $1.55 billion. That would be a jump of more than 44% from its 2018 sales of around $1.1 billion. SHOP expects its 2019 operating loss to be between $158 million and $168 million.
For Q4, SHOP provided sales guidance of between $472 million and $482 million. But its losses will continue, as SHOP estimated that its Q4 operating loss will be $47 million to $57 million.
The owners of Shopify stock have been willing to ignore the company’s losses because SHOP is growing, and they’re eagerly awaiting the company’s transformation into a $10 billion+ enterprise. In an effort to accomplish that goal, SHOP has set it sights on fulfillment.
What Will Move the Needle for Shopify Stock?
InvestorPlace columnist Tom Taulli believes that innovation will be a key to the success of Shopify stock. Taulli discussed Shopify’s fulfillment strategy, especially its recent purchase of 6 River Systems, which has given SHOP the technology to develop an automated fulfillment network. Its pivot to fulfillment is a long-term strategy that will likely take years to pay off.
Another positive catalyst for Shopify stock is Gross Merchandise Volume per merchant. Rosenblatt Securities analyst Mark Zgutowicz says that the company’s GMV per merchant grew 8% YoY.
Shopify’s long-term success is tied to that of its merchants. While the company could get rich selling shovels during the e-commerce gold rush, its long-term strategy is to help build up emerging e-commerce stores and brands.
But the company faces growing competition in e-commerce software-as-a-service. Shopify is unique because it targets all levels of e-commerce, from enterprises to aspiring entrepreneurs. At the top end, SHOP competes with Adobe’s (NASDAQ:ADBE) Magento, Salesforce (NYSE:CRM), and Oracle’s (NASDAQ:ORCL) Commerce Cloud. At the “garage entrepreneur” level, the company competes with Wix (NASDAQ:WIX) and Woo Commerce.
Meanwhile, Shopify stock has gotten ahead of itself. SHOP stock trade at an Enterprise Value/Sales (EV/Sales) ratio of 24.3. That vastly exceeds the valuations of high fliers like Salesforce, which only trades at an EV/Sales ratio of 9.4.
But SHOP stock could grow into its valuation. Once Shopify achieves positive EBITDA, the market could continue giving the shares a high valuation. For example, Salesforce currently trades at an enterprise value/EBITDA (EV/EBITDA) ratio of 67.3.
The Bottom Line on SHOP Stock
If current trends continue, Shopify stock will be well-positioned to become the Salesforce of e-commerce. But competition from more established software providers will limit the company’s ability to attract more corporate customers.
However, given the sheer number of online stores operating worldwide. by focusing on emerging names, Shopify could sustain above-average growth in the years to come.
But it will take a long time for SHOP to turn its sales into profits. I believe SHOP stock has gotten ahead of itself, so it’s likely to fall in the short-term.
I wouldn’t bet against Shopify stock. But at its current price, the stock’s risk/return is not favorable. Investors should stay on the sidelines on SHOP stock and pounce when its valuation is more reasonable.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.