Shopify Stock Forecast: Is SHOP a Buy?

Written by Sean GraytokUpdated: 8th May 2022
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This Shopify Stock Forecast will assess the investment potential of SHOP going forward. 

Shopify Stock Forecast: Background

Shopify is a subscription-based software that allows anyone to set up an online store and sell their products.

Shopify was founded in 2006 by Tobi Lütke and Scott Lake after attempting to open an online store for snowboarding equipment. Tobi wasn’t satisfied with the existing e-commerce platforms, so he built his own.

Fifteen years later, more than 1,000,000 merchants use Shopify to run their business.

Shopify Stock Forecast: Investment Potential

#1. The Shift to Online

While the pandemic accelerated digitization, society’s shift to online is still in its early stages. Only 3% of global commerce occurs online.

More specific to Shopify, online retail accounted for 11% of total retail sales in 2020.

We expect this percentage to exponentially flip in the coming years, a likely eventually even without the pandemic accelerant.

Certain brands and services will always require a brick-and-mortar presence, but commerce’s shift to online enables more participants in the capitalist arena.

#2. The Rising Creator Economy

Gone are the days of undertaking massive overhead to open up a store and hire employees. Shopify’s services dramatically lower the friction to starting a business.

It’s never been easier to monetize an idea or audience thanks to companies like Shopify.

In addition, Shopify has an incentive for its merchants to succeed because it collects a percentage of their sales, a dynamic similar to Stripe and Block (SQ).

As merchants scale on Shopify’s platform, they can layer on additional Shopify services to accommodate growth.

This reinforcing cycle can result in serious growth for Shopify and its merchants.

#3. SHOP as a Seed Round

Shopify stock doubles as a seed investment in the creators of the future.

And there’s lots of creating happening — Shopify’s platform has created tons of wealth for decentralized merchants and developers.

Buying Shopify stock is a way to get indirect exposure to this new class of entrepreneurs.

#4. Developer Community

The Shopify Partner program empowers third-party developers to create apps, themes, and other integrations built on Shopify’s platform.

Shopify’s robust developer platform welcomes developers of all sizes, from solo freelancers to boutique design shops to global-scale agencies.

This service adds another economic layer to the Shopify community. Merchants and software developers build on Shopify’s platform, and all three parties benefit.

Shopify has become a magnet for all types on the creative spectrum. From fashion designers to computer programmers, talent is flocking to Shopify.

Shopify Stock Forecast: Economic Moat

We believe the following equation describes Shopify’s moat:

Merchant Obsessed + Product Market Fit + Developer Community

We are at the precipice of an industry shift in commerce, and few companies are better positioned to benefit from this shift than Shopify.

Despite the rise of digitization in every industry, the arbitrage between offline and online retail is still enormous.

Combining this catalyst with a company culture that values its revenue multiplier (creative merchants and developers) makes Shopify dangerous.

Shopify Stock Forecast & Analysis: Q4 Earnings

Shopify reported recently Q4 earnings. Let’s see the highlights from the call:

  • Total revenue: $1.38 billion, up 41% year-over-year
  • Subscription Solutions revenue was $351.2 million, up 26% year-over-year
  • Merchant Solutions revenue was $1.03 billion, up 47% year-over-year
  • Gross Merchandise Volume (GMV) was $54.1 billion in the quarter, up 31% year-over-year

Shopify announced that revenue growth for 2022 would be slower than the 57% it did in 2021. 

The company thinks that rising inflation will result in less consumer spending, which will inevitably hurt Shopify.

Shares of Shopify traded down 16% after the release.  

Shopify Stock Forecast: The Competition

The pandemic forced brick-and-mortar businesses to launch or increase their online presence. While many merchants opted for Shopify, there are plenty of other options.

Here are Shopify’s top competitors:

  • (AMZN)
  • Wix (WIX)
  • Squarespace (IPO 2021)
  • BigCommerce (BIGC)
  • Volusion
  • WooCommerce
  • Big Cartel
  • Square Online Store (SQ)
  • Salesforce B2C Commerce

We believe that Shopify’s differentiator is its frictionless on-ramp to e-commerce. At the end of the day, a superior product will attract and retain customers.

Shopify Stock Forecast: The Risks 

#1. Overvalued

Shopify has been called overvalued since its first day on Wall Street. After surging 51% on its IPO day to $28 per share, many thought they had missed it entirely.

About 3,000% percent later, it’s the same narrative with Shopify.

However, Shopify is overvalued by most traditional metrics — the stock trades at 33x sales compared to 4x from Amazon.

Granted, these stocks are dramatically priced differently because Wall Street has different expectations for each at these current levels. 

Tech valuations are becoming tougher to price, especially the select companies that are given a free pass to run away from reality.

“Fundamentals don’t matter until they do.” We might see this play out in 2022 if the Federal Reserve follows through on its planned rate hikes.

#2. eBay 2.0

Shopify’s leadership proactively avoids repeating the mistakes of previous e-commerce platforms, such as eBay.

As eBay grew, the experience became worse for the merchants and better for buyers. eBay prioritized short-term growth by favoring buyers over the individuals that were supporting the platform: sellers.

Shopify must optimize its short-term growth efforts while preserving its relationship with merchants. This challenge will be most apparent in the company’s newest product launch, the “Shop App”.

This app makes it easy for shoppers to buy from their favorite independent brands, in addition to improving the checkout, tracking, and shipping process.

However, Shopify could jeopardize its relationship with merchants if the Shop App oversteps. Merchants will suffer if the app turns into an aggregator that allows shoppers to search across all Shopify stores.

While that feature would drastically increase revenue over the next few quarters, it would be at the long-term detriment to Shopify’s foundation of merchants, which in turn hurts developers.

Shopify Stock Allocation in Your Portfolio

The optimal portfolio construction varies from person to person. However, the following questions might help you determine the right amount of Shopify stock to buy if any:

  • Will Shopify continue to outperform the S&P 500 and Invesco QQQETF?
  • Did pandemic tailwinds pack years worth of growth into a 12 month period?
  • Will Wall Street react negatively to Shopify having less income in 2021 than 2020, despite providing clear guidance on the matter?
  • Will pent-up demand for offline retail last? Possibly slowing the shift to e-commerce.
  • Will Shopify put its excess capital to work and continue to make strategic investments and acquisitions?
  • Is Amazon a better bet on the future of retail and e-commerce?

Price appreciation should not be a person’s only investment criteria. It’s important to consider if there is a better upside elsewhere or a more attractive risk to reward profiles in other names.

Shopify Stock Forecast: FAQs

Is it good to buy Shopify stock?

Shopify stock has gone up and to the right for most of its time in the public markets. It IPO’d at $12 a share and got as high as $1500 just a few years later. While past performance is not indicative of future returns, the company has clearly established a culture of innovation that will likely continue to reward shareholders.

Is Shopify a buy or sell?

Shopify is a buy or sell depending on your financial situation and investing goals. It’s an expensive stock to own at its current levels, but buyers are counting on it to grow into its valuation.

Is Shopify stock overpriced?

Some believe that Shopify is overpriced and will point to its eye-watering price to sales ratio. Shopify buyers are counting on the company to dominate e-commerce as this new market takes off.

Why is Shopify stock going down?

Shopify is a high-growth tech stock that trades at expensive multiples. Stocks in this category tend to sell off when interest rates rise (or fear of rates rising). Rising rates decrease valuations because it makes those future earnings less valuable. The first valuations to come back to earth are typically tech stocks like Shopify.

Bottom Line: Shopify Stock Forecast

A bet on Shopify is a bet on the creator class of entrepreneurs. Shopify is young, and so is the potential for online commerce.

While a company and its stock price are two separate things, we believe Shopify’s leadership will execute on opportunities to justify its lofty valuation.

More Stock Forecasts:

This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and public equities research methodology to learn more about how we researched Shopify stock.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and leading expert in investing and financial management. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and technologies that are improving the world.