Shopify Stock Has Runway, but Don’t Buy It Just Yet

Up almost 25% in a month, Shopify (NYSE:SHOP) is making a comeback. Shares slid below the $300 price level a few times during the fall. But with this recent rebound, shares could trek back up beyond the $400 price level.

Shopify stock
Source: Beyond The Scene /

But as Shopify’s stock price accelerates, are revenues decelerating? In the past, Shopify posted quarterly growth well above 40%. But with analysts expecting sales to rise 36.5% in 2020, the growth train is hitting the brakes. While Shopify sees itself as the next Amazon (NASDAQ:AMZN), growth could peter out way before it reaches the size of Amazon.

Add in growing competition from big tech, and Shopify’s salad days could be over. Yet, this competition could mean opportunity for Shopify investors. Let’s take a closer look, and see whether Shopify is a buy today.

Amazon’s Arrogance Could Be Shopify’s Gain

In its path to $1 billion in annual revenue, Shopify had a tremendous run. Early adopters remain highly loyal to the software-as-a-service (SaaS) platform. But as InvestorPlace’s Vince Martin wrote Dec. 6, Shopify could have troubles signing up more merchants. Add in modest growth from its existing merchants, and it may be hard for Shopify to meet sales growth expectations.

But Shopify’s popularity amongst small e-commerce shops is just the start. The real prize is Enterprise. If Shopify can win over major brands, Shopify could be to e-commerce what Salesforce (NYSE:CRM) is to CRM.

What could drive this move forward? New add-on initiatives (such as fulfillment) could be the catalyst. But Amazon’s arrogance could be the best factor working in Shopify’s favor. Take for example Nike’s (NYSE:NKE) pulling of its products from Amazon. Third-party sellers are threatened by Amazon’s aggressive tactics and lack of concern for their success.

Merchants are now less willing to pay the piper and tolerate Amazon’s behavior. Going at it alone may exceed the benefits of Amazon’s massive marketplace. But even Nike isn’t cutting ties completely. Nike will continue to use Amazon Web Services (AWS) to handle its back-end.

But for smaller enterprises, Shopify may be the right service provider. Shopify offers merchants a flexible way to scale. All without having to deal with Amazon’s passive aggressive tactics. Yet Shopify isn’t the only game in town. Competition from “Big Tech” is heating up. With that in mind, it’s tough to justify Shopify stock’s currently high multiples.

Shopify Trades at a Frothy Valuation—But Could Be a Takeover Target

Trading at a price-to-sales (Price/Sales) ratio of 29.1, it’s safe to say Shopify trades at an inflated multiple. Even as growth cools off, investors remain overenthusiastic over Shopify’s growth prospects. But while value investors consider the stock overvalued, Shopify’s big tech competitors could see the value in acquiring Shopify outright.

With the company having a $43.1 billion market capitalization, this is a tough pill to swallow. But hear me out: Just last week, Jim Cramer mentioned that two large companies told him of their interest in buying Shopify. Now Jim Cramer isn’t right 100% of the time, but there is some logic to this “heard on the street” anecdote.

“Big Tech” wants to dominate e-commerce SaaS. Names like Adobe (NASDAQ:ADBE), Oracle (NASDAQ:ORCL), and Salesforce are growing their presence. Microsoft (NASDAQ:MSFT) also wants a piece of the pie. But buying out Shopify could be a quicker way to reach these goals.

Acquiring Shopify may be out of the cards for Adobe and Salesforce, but Oracle and Microsoft could stomach such a buy. With $136.6 billion in cash on hand, Microsoft can cut a check today and buy out the company.

Now why would Microsoft pay tens of billions for an unprofitable business? Opportunity. With Microsoft’s market reach, capital, and expertise, they could better grow Shopify’s Enterprise business. Microsoft could also cross-sell its Azure cloud services to Shopify customers. The many levels of synergies could, in hindsight, be well worth the acquisition price.

But while it’s fun to speculate on this, don’t hold your breath. Shopify’s head honcho doesn’t seem too keen on cashing out. I wouldn’t buy Shopify on takeover talk. But the business does offer a large acquirer instant expansion in e-commerce SaaS.

For Now, Stay on the Sidelines

Shopify stock is gaining steam as investors bid shares back up towards $400/share. But should you join the crowd? Probably not. I don’t have a bearish view on Shopify long-term. Even with slowing growth, Shopify could scale into a SaaS powerhouse.

The company’s potential could also make it a takeover target. It would entail a huge cash outlay. But a tech giant like Microsoft could synergize Shopify with its Azure cloud services, giving Amazon a run for its money.

Yet, the current valuation accounts for these opportunities. Wait for a pullback to make a move. For now, stay on the sidelines with Shopify.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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