Shopify (NYSE:SHOP), which operates a platform that provides eCommerce services to small businesses, seems unstoppable. The company now has a market value of $45 billion. This compares to eBay’s (NASDAQ:EBAY) $29 billion. In fact, among eCommerce companies, Shopify stock has the second-highest value.
Keep in mind that the return for the year has been a sizzling 180%. What’s more, for the past three years, the average gain on Shopify was 109%.
Now the success is certainly well deserved. Over the years, the company has focused intensely on innovation, such as by adding new services like lending, mobile commerce, point of sale systems, and so on. Shopify has also been smart with its partnership strategy, having struck deals with companies like Facebook (NASDAQ:FB).
The result is that the company has built a massive base of merchants, with over one million.
But despite all this, I think there actually should be some caution. There are signs that the investor enthusiasm is overdone – and that 2020 may not be a sure thing.
So let’s see why:
Growth
The idea for Shopify came when Tobias Lütke couldn’t find a good way to sell snowboards. So he started his own platform! Interestingly enough, Shopify took a few years to get much traction. But this was fine as Lütke wanted to evolve the system to meet customer needs.
The strategy has certainly paid off in a big way as Shopify has been a long-time fast grower.
Yet as the revenue base has increased, there has been a notable deceleration. For example, in 2015 to 2016, the growth was over 90%. But by 2017, revenues jumped by 73% and a year later, it was 59%.
And as for the most recent quarter? Well, the revenues rose by 45%. In fact, for 2020, it looks like the increase will be 37% or so.
True, this is definitely strong. However, given the lofty expectations and the high valuation, this growth may not be enough.
Competition
In today’s dynamic world, it is extremely tough to maintain an edge in the tech market. There are huge amounts of venture capital sloshing around the globe looking for cutting-edge startups.
Although, regarding Shopify stock, the main competitive threat appears to be the large tech companies. They are looking for ways to keep up their growth, and eCommerce is certainly an attractive way to do this.
To this end, Facebook’s Instagram has been making moves into this category. The platform is massive but also allows for immersive experiences that younger buyers appreciate.
Then there is Adobe (NASDAQ:ADBE), which has transformed itself over the past few years. Part of this has been a focus on cloud computing. But Adobe has also been assembling a set of powerful eCommerce assets, such as Magento and Marketo. These have synergies with other parts of the business like web and graphic design tools.
Finally, Microsoft (NASDAQ:MSFT) has been leveraging its Dynamics 365 system for eCommerce. While still in the early stages, the company certainly has the resources to make a big play here.
Valuation of Shopify Stock
Yes, the valuation on Shopify stock is really stretched. After all, the shares are trading at a nosebleed 32-times sales.
While it’s true that the company should fetch a premium, this one is really off the charts. Even worse, despite the large revenue base, the company still has a cash burn. And with the decelerating growth rate, it’s going to get tougher to maintain the valuation and it seems inevitable that there will be a risk of disappointment and perhaps soon.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
