Shopify (NYSE:SHOP) stock is on fire year-to-date. Shares in the e-commerce platform zoomed 134% from January, with the stock currently trading around $322 per share. While the company’s cloud-based SaaS solution for retailers is a game-changer, it is tough to justify a buy at the current valuation levels.
But with sales up 50% year-over-year, do the bulls have a point? Read on to see if Shopify stock is worth the sticker price.
SHOP Continues to Grow
Shopify made its bones offering “back-end as a service” for scores of small e-commerce businesses. With that market locked up, SHOP stock needs new growth avenues to move the needle. With the company’s move toward large enterprise customers, Shopify has found new ways to scale up the business into a global e-commerce powerhouse.
Based on Q1 2019 results, the growth story continues to play out. Total revenues were $320.5 million, up 50% year-over-year. Subscription revenues were up 40%, as merchants continue to sign up for the platform. The biggest growth was in Merchant Solutions, up 58% YOY. This growth was driven largely by increased merchandise volume among Shopify’s third-party merchants.
Shopify continues to develop its infrastructure, allowing them to become a global e-commerce powerhouse. The company’s payments platform now enables merchants to accept sales in multiple currencies and get paid in their local currency; 40% of eligible merchants now use Shopify’s shipping platform. The company’s merchant cash advance unit grew 45% YOY.
Shopify is to e-commerce what Salesforce is to CRM. The rise of e-commerce continues to be SHOP’s strongest catalyst. But as SHOP scales up, will the company stumble along the way?
With the Q2 earnings release anticipated to occur in August, within a few weeks, investors will have a clearer picture of Shopify’s future growth. But for the time being, Shopify’s recent fulfillment center announcement indicates their long-term strategic plans.
With Fulfillment Center Expansion, Is Shopify the Next Amazon?
Shopify surprised Wall Street with their announced plans to build their own fulfillment centers. The move created speculation that SHOP will go toe-to-toe with Amazon (NASDAQ:AMZN) for a bigger piece of the e-commerce pie.
But can SHOP become the next AMZN? Building out their infrastructure makes Shopify a stronger partner for third-party retailers. But with the company barely generating $1 billion in sales, how do they expect to finance this massive build-out?
Based on CFO Amy Shapero’s presentation at Shopify’s Investor Day, the company anticipates the fulfillment investment to be spread over the next five years. Shopify expects “incremental revenue to largely offset costs”. The company anticipates positive returns on this investment to occur after 2023.
The fulfillment build out is a long-term investment. Investors today pay a substantial premium for the expectations of Shopify’s game-changing moves. But can this anticipated growth alone justify SHOP stock’s current valuation?
Valuation: How SHOP Stock Stacks Up to Its Peers
With SHOP continuing to post operating losses as it invests in growth, enterprise-value-to-sales is the best tool to compare SHOP stock’s valuation to peers. Shopify currently trades at a EV/Sales ratio of 28.
Here are the EV/Sales ratios of Shopify’s main publicly traded peers:
PayPal Holdings (NASDAQ:PYPL): 8.5
Square (NYSE:SQ): 9.4
Twilio (NYSE:TWLO): 24.7
The Trade Desk (NASDAQ:TTD): 21
But given that Shopify is purely a SaaS platform, it is tough to compare valuation against its direct competitors. Amazon, being a full-fledged retailer as well as a marketplace, obviously trades at a lower EV/Sales valuation. PayPal is a fully scaled up operation, with slower growth but high operating margins.
Twilio and The Trade Desk operate in different industries, but are similar to Shopify in that both are cloud services providers (cloud communications for Twilio, digital advertising for The Trade Desk).
With Shopify stock trading at a premium to fellow B2B service providers TWLO and TTD, SHOP appears richly valued. While the company is making leaps and bounds dominating e-commerce, the stock is not a buy at these valuation levels.
Bottom Line: SHOP Stock Not A Buy Today
Ten years down the line, Shopify could be a formidable competitor to Amazon. But at the current trading price, SHOP stock is too overvalued for investors to consider.
While the company has seen significant growth in revenues, the company has yet to be profitable. While the announced fulfillment expansion is a positive catalyst for future growth, investors need tangible results before putting in a buy order.
Short term, SHOP stock is a sell. A massive pullback could signal a buying opportunity to place a bet on SHOP’s future prospects. But until then, investors should be cautious before chasing this growth story.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
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