Investing in Shopify (NYSE: SHOP) stock could bring unexpected challenges at its current stage. Although the stock price peaked more than three years ago, it trades at a discount of more than 60% from that 2021 high, implying it is not too late to buy.
Conversely, the bull market in 2021 took stocks to levels not justified by the underlying businesses, an indication that the all-time high is not a suitable benchmark. Additionally, it has nearly tripled from its bear market low in 2022, indicating that the stock may have grown beyond its fundamentals.
With the price of nearly $70 per share as of the time of this writing, are investors too late, or is now the time to add Shopify shares?
The state of Shopify
Shopify started as one of many online platforms for e-commerce. Such ecosystems appeal to merchants wanting to operate independently rather than depend on an online giant such as Amazon.
Unfortunately for Shopify, it faces significant competition from Wix, Squarespace, Adobe, and numerous others. Still, despite the large number of peers, Shopify has developed competitive advantages that help it stand out over other platforms.
For one, it is a no-code platform that allows entrepreneurs with no IT expertise to build a highly customizable website for online sales. Also, because it placed a priority on having the fastest website, sellers turned to it for efficiency.
Additionally, Shopify expanded its competitive advantage by adding ancillary services to help sellers. These services included platforms for online marketing, a segment to help businesses raise capital, and a platform for inventory management that also could handle items sold online.
Unfortunately, the SaaS stock suffered in recent years after Shopify attempted to start a logistics arm. While succeeding with order fulfillment and shipping would have expanded its competitive advantage, the fixed costs of building this network took their toll on its financials.
Consequently, Shopify returned to losses, and its stock value plunged. Such results eventually forced the sale of the logistics business, and both its financials and stock price began a gradual recovery after the sale.
How it fared financially
Fortunately, Shopify's financials are again improving. In the first six months of 2024, Shopify reported $3.9 billion in revenue, a 22% increase compared to the same period last year.
Also, the company kept the growth of the cost of revenue in check and reduced its operating expenses, over and above a massive impairment charge last year from the sale of the logistics business.
Consequently, the net loss for the first half of 2024 was $111 million, down from more than $1.2 billion in the same year-ago period. Moreover, since it earned $170 million in the second quarter, Shopify could return to sustained profitability soon.
Unfortunately for Shopify bulls, this has not yet helped the stock significantly. Over the last 12 months, it is up less than 10%.
Still, its price-to-sales (P/S) ratio is around 11. This is a historically low level for the company, indicating it could experience considerable multiple expansion if sentiment turns more positive. With the company seemingly profitable again, now could be an excellent time to turn bullish on Shopify stock.
Are investors too late?
Considering Shopify's growth and valuation, investors are likely not too late to buy this stock.
Admittedly, it is a long way from its all-time high, and the company's current financials make it unlikely to return to that level anytime soon.
Nonetheless, Shopify has built a competitive advantage in a crowded industry through a fast, easy-to-use platform and an extensive ecosystem.
Moreover, at a comparatively low 11 P/S ratio, the market values Shopify at a level from which its fast-growing revenue and move back to profitability could bring investors back into the stock. This should bode well for the company and its shareholders as anticipated continued growth and rising profits push its stock higher over time.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has positions in Shopify. The Motley Fool has positions in and recommends Adobe, Amazon, Shopify, and Wix.com. The Motley Fool has a disclosure policy.
