Shopify (SHOP) has established itself as the leader in providing trusted tools to start, grow, market, and manage a retail business of any size, online. The company strives to enhance the experience of shopping online for everyone with a platform and services that have been built with reliability and innovation in mind.
In today’s world, businesses must have a solid online presence when it comes to shopping, and Shopify’s remarkable tools like Shopify Capital, Shopify Pay, and Shopify Shipping have been beneficial to the success of many of its customers. This has been the case especially during the ongoing COVID-19 pandemic, which has massively shifted sales volumes from physical locations to online.
While the company’s performance has been truly marvelous, as it grows its financials consistently and positions itself for the future, the stock’s valuation remains quite steep. That could negatively affect shareholder returns going forward. I am bullish on the stock. However, investors need to be wary of Shopify’s premium multiple. (See Insiders’ Hot Stocks on TipRanks)
Q3 Results – Another Strong Quarter
In its Q3 results, Shopify reported revenues of $1.12 billion, a miss of $30 million, but still 45.9% higher year-over-year. Subscription solutions revenues also grew 37%, while merchant solution revenues came in 51% higher versus the comparable period last year.
Shopify’s revenues grew by over 85% last year, boosted by the effects of the pandemic. Hence, seeing the company still grow at this rate today after following such a one-off boost is very impressive.
EPS came in at $0.81 vs. $1.13 a year ago, missing consensus estimates of $1.22. In my view, the miss was hardly worrisome, since Shopify’s bottom line should not be a priority at the moment. Capturing as much growth as possible at the current state of the market seems like a much wiser direction to take.
It’s worth mentioning that Shopify is currently under pressure, as many of its merchants are being impacted by the ongoing supply chain constraints, including increasing logistics and labor costs. Hence, it’s possible to see Shopify’s growth even accelerate once the current logistics challenges ease.
Shopify’s Valuation
Since it would not be meaningful to value Shopify based on its current profitability, we are looking at its expected revenue growth and multiple on next-twelve-month sales. The stock is currently trading at 36.6 times its NTM sales, which is a steep multiple even for Shopify’s ongoing revenue growth trajectory. Analysts expect the company to grow its top line by a CAGR north of 30% in the medium-term. Still, a forward P/S of around 25-30 would make more sense to me.
That said, it’s truly hard to buy Shopify at a discount, and paying a premium for the stock has historically been worth it, because the company usually outperforms consensus estimates. I am bullish on the stock due to the company’s deep moat and industry-leading position. Simply put, it’s a must-have stock in the space, in my view. Still, I note that investors need to be aware of the underlying risks of a potential valuation compression going forward, however (un)likely that may be.
Wall Street’s Take
Turning to Wall Street, Shopify has a Moderate Buy consensus rating, based on 10 Buys, nine Holds, and zero Sells assigned in the past three months. At $1,670.86 the average Shopify price target implies 6.22% upside potential.
Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Shopify through stock ownership.
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