Shopify (NYSE:SHOP) has stalled out. A rally to all-time highs last month reversed quickly. SHOP stock has now traded flat over the past five-plus weeks.
That’s not bad news, however. With a name like Shopify, which has gained a staggering 693% in the last three years, it’s almost tempting to assume that flat trading means something has gone wrong.
But SHOP stock has seen these patterns before. The stock consolidated toward the end of last year after a summer swoon. Within three months it had doubled to an all-time high. Shares flattened in the second half of April; new highs again followed. Investors can go back to the second half of 2018 — when SHOP declined — or the quiet summer of 2017. The story has always ended the same way.
To put it simply, we’ve been here before. Each time, SHOP stock simply needed a pause before resuming its upward march. I expect the same pattern will repeat.
In the meantime, investors taking the long view should be rooting hard for another short-term stumble to create an even better buying opportunity.
The Shopify Debate
At this point, I don’t believe there’s much debate over the quality of Shopify as a business. Back in 2017, short seller Citron Research alleged that Shopify was using aggressive tactics in affiliate marketing to create an unsustainable burst in users and revenues. Citron has had some hits — most notably on Valeant Pharmaceuticals, now known as Bausch Health (NYSE:BHC) — but its short case for Shopify was a clear miss.
With those allegations falling flat, there’s simply not much to dislike here. Shopify’s turnkey platform for small and medium businesses is absolutely dominant. The company is moving upmarket to larger customers as well. In a world where small, unique and online are all positive attributes, Shopify is perfectly positioned.
The debate for the most part comes down to valuation. SHOP stock trades at a staggering 46x trailing twelve-month revenue.
We’ll get to valuation in a moment, but it’s worth staying with the business discussion to make a key point. I actually believe Shopify’s business, at this point, is somewhat underrated.
Investor attention focuses on the core platform. But it’s the company’s expanding reach that underpins a growth story that literally has decades to play out.
Shopify’s move into fulfillment last year garnered headlines. But investors should review the news from the company’s Reunite virtual event from last month as well. The announcements Shopify made highlight just how integral the company is becoming to businesses worldwide.
Shopify launched Balance, which provides a business account for entrepreneurs. It includes credit and debit cards, merchant rewards and payment tracking.
The company is enabling “Buy Now, Pay Later” for its merchants. It’s adding a local delivery option. And the event follows the launch of a direct-to-consumer app named Shop.
Investors should understand the totality of these moves. What Shopify is giving merchants — and not just small online retailers — is essentially the ability to act like a much larger company.
Put another way, these efforts, combined with the core platform and fulfillment, bring the benefits of scale to entrepreneurs and businesses who lack that scale.
That is a truly transformative offering. Without exaggeration, Shopify is upending the business world.
And that’s why I think the business has become underrated at this point. Investors know Shopify has a great platform. I’m not sure enough investors realize how much the company’s additional efforts matter.
SHOP Stock Is Not Too Expensive
Skeptics will retort that this all might be true, but SHOP stock still is too expensive. With the exception of Zoom Video Communications (NASDAQ:ZM) and Datadog (NASDAQ:DDOG), there isn’t a major tech stock that has a higher price-to-revenue multiple. A forward price-to-earnings multiple over 1,100x seems almost ludicrous.
But there are simple retorts to that concern. First, SHOP stock obviously shouldn’t be cheap. This is a company growing revenue at a 35%-plus clip whose addressable market is absolutely massive. There’s not going to be a market that puts Shopify stock truly “on sale.”
Second, the price-to-earnings multiple is inflated somewhat by thin margins. And those margins are being impacted by investments made in sales, marketing and the new efforts (including fulfillment). Those are precisely the kind of investments Shopify should be making right now.
Finally, its high valuation is not a reason to sell, particularly in this market. Again, good companies are not supposed to be cheap. Given that we’ve seen Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN), Zoom and so many others rally through short-term valuation fears, that lesson should be learned by now.
SHOP stock is not going to get cheap. The only hope at this point is that it might get cheaper. Again, we’ve seen investors sell off the stock in the past, and after rocky trading Thursday that may occur again.
Long-term investors should hope it does, because Shopify’s stock is a buy at the current price. It would be an even better buy if the market makes the same mistake again.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.