Investors who demand value may take a quick “pass” on Shopify (NYSE:SHOP) by looking at its price-to-earnings ratio near 2,000 times. Yet momentum and growth investors may point to its exceptionally strong historical and future growth rates.
In the last quarter, strong revenue continued but as profits disappointed, the dip in Shopify stock proved short-lived.
So, how much more upside does Shopify bring to shareholders, now that the stock closes at 52-week highs almost daily?
Weak Third Quarter Is Temporary
Shopify reported fiscal 2019 third-quarter earnings on Oct. 29, and announced that its revenue grew 45% year-over-year. Gross merchandise volume came in at $14.8 billion, an increase of 48%, yet the company posted an adjusted net loss of $33.6 million. CEO Amy Shapero said, “Our strong results in the quarter were driven in part by the success of our international expansion, which is just one of the many ways we are investing in the platform.”
And just look at the provision for income taxes and investors will soon realize that the international expansion costs $48 million. This is a short-term pain that will lead to long-term gains. How? Shopify’s addressable market will expand globally. In the quarter, the company posted strong cash flow and adjusted operating income of $10.5 million. Above all, for the full-year 2019, Shopify forecast adjusted operating income in the range between $27 million and $37 million.
Shopify’s business is positioned for considerably stronger growth in 2020. It faces no real competition in the multi-channel business-to-business space or the direct-to-consumer markets. So, this year, chances are good that its earnings per share will beat consensus estimates.
Still, analysts are bullish on Shopify stock. Also, there are 9 buys and 7 holds on the stock. But the average price target is $423.15. Sure enough, a 10-year discounted cash flow EBITDA exit model might assume revenue growth slowing to 15%. In that scenario, the stock trades close to the fair value already.
On the Stock Rover research report, Shopify stock has a value score of 56 (based on such ratios as enterprise value-to-EBITDA, P/E and price-to-sales). But its sentiment score is 89, based on the stock’s days since hitting a 52-week high, moving average convergence/divergence (MACD) and short interest. Here is Shopify’s valuation compared to the S&P 500 and its broader industry.
And here is Shopify’s sentiment profile. Looking at these two tables it is clear that Shopify stock scores higher than both its broader industry and the S&P 500 when it comes to sentiment score. But its value score does ring in below that of the major index.
Strong Quarterly Report Expected
Shopify shared Black Friday sales on Dec. 3, 2019. It showed that it topped over $2.9 billion in sales. In other words, this is up sharply from last year’s $1.8 billion-plus levels. It said that the “sales demonstrate the power of borderless commerce and how independent businesses and direct-to-consumer brands around the world have become the heroes of Black Friday/Cyber Monday.”
After watching Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) struggle to compete with the online marketplace, Shopify’s dominance in the online space is unquestionable. As a side note, China’s Baozun (NASDAQ:BZUN) is nowhere near comparable to Shopify. For example, Shopify is rated No. 1, according to the G2 website, which is a Chicago-based peer-to-peer review site. The stock market also reflects the disparity, with Baozun at risk of falling lower. After Shopify reports quarterly results on Feb. 12, the stock may break out to new highs if its profits exceed consensus estimates.
My Takeaway on Shopify Stock
Shopify’s exceptionally strong annual revenue growth is unstoppable. Earnings will grow at almost 50% annually, justifying the stock’s high valuations. Traditional value investors need to ignore metrics like price/earnings-to-growth, the price-to-book ratio and P/E ratios for now. Buying interest in the stock is strong and may accelerate as the company grows at a high rate. By 2024, revenue may top $7.5 billion, over six times where it is today.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.