COVID-19 beneficiary Shopify (TSE:SHOP) (NYSE:SHOP) had totally gone out of favor in 2022. The ongoing macroeconomic environment has hit the consumer discretionary spending space hard. It comes as no surprise then that the e-commerce and online retail giant Shopify has suffered tremendously. However, given the cheap valuation, strong growth potential based on gross merchandise value (GMV) trends, as well as the expected return to profitability from the upselling of the new products, I believe the time is right to acquire Shopify stock.
Based in Canada, Shopify operates a cloud-based e-commerce platform helping small and medium-sized businesses. Its software-as-a-service (SaaS) business offers tools to merchants to enable them to sell their goods and services online across all sales channels.
Shopify was among the biggest beneficiaries of COVID-19 lockdowns that triggered stupendous growth for the stock. The stock touched its all-time high of $176.29 in November 2021. Currently, it is trading under $35.
Interestingly, hedge funds are making the most of the stock. According to TipRanks’ Hedge Fund Trading Activity tool, SHOP stock has a very positive signal from hedge fund managers, who added 8.9 million shares during the last quarter.
Catherine Wood’s ARK Investment Management LLC bought $400 million worth of Shopify shares last quarter, reaffirming ARK’s bullish stance on the stock.
Let’s take a deeper look at Shopify to evaluate if it’s the right time to buy the stock.
Favorable Sales Trend Despite Challenging Environment
On November 29, Shopify disclosed that its merchants witnessed a record Black Friday Cyber Monday (BFCM) weekend, registering 19% year-over-year growth in merchant sales to $7.5 billion globally. However, it was lower than the 23% growth seen last year, which was aided by the COVID-19 situation.
Further, merchants powered by Shopify reported 18% year-over-year growth in the number of customers to 52 million, and standalone Black Friday GMV saw 17% year-over-year growth to nearly $3.4 billion. The current numbers still beat the street’s expectations and came as a relief alleviating concerns over weak consumer spending.
In addition, spending data showed that global consumers on the Shopify platform, on average, spent $102.10 ($104.80 on a constant currency basis) per order through the BFCM weekend. This is higher than the average of $100.70 spent per order in the prior-year period.
Shopify’s Upbeat Q3 Results
On October 27, the company reported upbeat Q3 results that beat both earnings and revenues expectations. Its adjusted loss of $0.02 per share beat analysts’ estimates of a $0.07 per-share loss. Total revenues jumped 22% year-over-year to $1.4 billion. The growth was led by an 11% growth registered in GMV to $46.2 billion.
Laying out the outlook, the company management stated, “GMV growth will continue to outperform the broader U.S. retail market in the fourth quarter aided by our omnichannel capabilities.”
During the earnings presentation, the company highlighted that “2022 is an investment year for Shopify”. The company gave out positive updates from its Shopify POS Go, its latest innovative hardware, which is an all-in-one mobile point-of-sale (POS) device. It helps merchants to scan barcodes, accept tap, chip, and swipe payments, and use Shopify POS entirely from a single handheld device.
Markedly, operating expense growth is expected to sequentially decelerate beginning from the next quarter, thereby aiding margin growth.
Shopify’s Strong Pricing Advantage
It’s important to note that Shopify has a strong pricing advantage. Its lower pricing compared to its peers makes it a more attractive proposition for more subscription growth in the future.
SHOP’s management is not planning to hike its pricing in a recessionary environment. However, its competitors have made increases in their pricing. That leaves comfortable headroom for Shopify to increase its pricing.
All in all, the take rate or the commission fee charged by Shopify could increase comfortably, leading to higher growth and profitability over the coming years.
Having said that, the company is still not profitable. However, it’s likely only a matter of time, and some pricing increases can make the company turn to profitability soon.
Is Shopify Stock a Buy, According to Analysts?
Turning to Wall Street, analysts are cautiously optimistic about the stock. Shopify stock has a Moderate Buy consensus rating based on 10 Buys, 12 Holds, and one Sell. Shopify’s average price forecast of $41.11 implies 18.5% upside potential.
In terms of valuation, Shopify looks extremely cheap. Currently, it’s trading at an attractive price-to-sales ratio of 8.7x. The current valuation reflects a huge 71% discount from its five-year average of 30x, presenting a great buying opportunity given the accelerated growth potential in the coming years coupled with margin expansion expectations.
Concluding Thoughts: Shopify Looks Attractive
Shopify has been one of the market leaders in the digital commerce space. It continues to add new customers, adding attractive features to its product portfolio, like POS & Shopify Markets. The stock has recovered from its all-time low of $23.63 seen in October 2022, driven by positive Q3 results. Despite the rally, there is still enough room for growth as the company looks on track to return to profitability next year.
Given the attractive risk-to-reward potential, I believe the current SHOP stock price offer an attractive entry point for investors.
