Shopify (SHOP) Stock Forecast and Analysis

Investing
Updated: 15th May 2021
Written by Sean Graytok
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Shopify has democratized entrepreneurship by allowing virtually anyone to start an online business — but is its stock a buy?

Let’s find out in this Shopify Stock Forecast and Analysis.

What is Shopify?

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.

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Shopify Stock 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 Square (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.

See: Google Stock Analysis

Shopify Stock 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.

See: Microsoft Stock Analysis

Shopify Stock Analysis

Shopify annihilated earnings on its April 28th call — let’s examine the highlights and see what company leadership had to say:

  • Total Revenue: $988.6 million vs $862.7 million expected, up 110% YoY
  • Earnings per share: $2.01 vs $0.75 expected
  • Gross Merchandise Volume doubled to $37.3 billion in the quarter, up 114% YoY
  • Merchant Solutions Revenue: $668 million, up 137% YoY
  • Subscription Revenue: $320.7 million, up 71% YoY

Shopify also announced a $1.3 billion unrealized gain on the company’s investment in Affirm Holdings (AFRM), a consumer finance disruptor that went public on January 13.

“Our full-year 2021 outlook is guided by assumptions that remain unchanged from February: that as countries continue to roll out vaccines in 2021 and populations are able to move about more freely, the overall economic environment will likely improve; some consumer spending will likely rotate back to offline retail and services; and the ongoing shift to e-commerce, which accelerated in 2020, will likely resume a more normalized pace of growth,” Shopify said in its earnings news release.

Wall Street reacted positively to the Q1’21 report — shares jumped as much as 11.4% following the call.

See: Netflix Stocks Analysis

Shopify Stock 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:

  • 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.

See: Palantir Stock Analysis

Shopify Stock Bear Case

#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 3,500% percent later, it’s the same narrative with Shopify.

However, Shopify is overvalued by most traditional metrics — the stock trades at 39x sales compared to 4x from Amazon.

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.”

#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.

See: PayPal Stock Analysis

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 QQQ ETF?
  • 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.

Bonus: Stock Tip from The Motley Fool

You might have bought Shopify at $12 a share had you been reading The Motley Fool Stock Advisor in 2015.

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See: The Motley Fool Review

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.

See: Palantir Stock Analysis

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.

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This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok
Sean is a student of the financial and technology industry. He is interested in the people and companies who are driving the innovation that will change our future.