Canada-based Shopify (TSE: SHOP) (NYSE: SHOP) operates a cloud-based commerce platform designed for small- and medium-sized businesses. Merchants use its software to run their businesses across all sales channels, including web, tablet, and mobile storefronts, social media storefronts, brick-and-mortar, and pop-ups.
Once a high-flying darling of the pandemic bull market, the stock has lost over 80% of its value from its peak. Undoubtedly, the stock is more attractive today than it was in November. However, is there still more room for it to drop?
Valuation
Shopify has always traded at a high valuation, as investors rewarded it for its high growth. The difference now, though, is that investors are no longer willing to pay high multiples for growth.
During the low inflation period after the Great Recession, investors could justify waiting for profitability because the value of their money wasn’t deteriorating much. Now, we are in a period of stubbornly high inflation, which equates to higher interest rates and lower valuations.
As a result, investors demand low P/E stocks or high-yielding dividend stocks with reasonably predictable earnings in all market conditions. Shopify is neither, as it trades at a forward P/E of 313x. Analysts expect the forward P/E ratio to drop to 37x by the end of 2025, but most investors are not willing to wait around that long at this time.
Business Fundamentals
Although the valuation is very high, the underlying business fundamentals are still strong. Its revenue is expected to grow 25.7% year-over-year in 2022 on top of the massive growth it witnessed during the past two years.
In addition, a quick look at its website traffic shows that the number of visitors continues to increase steadily.
This should help provide investors with some confidence that Shopify might be able to meet its growth targets. However, it is worth mentioning that the company has already lowered its guidance for Fiscal Year 2022, and it wouldn’t be too much of a surprise if it has to reduce it again.
Many companies have reported that they are starting to see a slowdown in consumer demand, especially in discretionary retail. Since Shopify earns a large chunk of its revenue from transaction fees, a slowdown in consumer spending will have an adverse impact on financial results.
Wall Street’s Take
Turning to Wall Street, Shopify has a Moderate Buy consensus rating based on 15 Buys, 11 Holds, and two Sells assigned in the past three months. The average Shopify price target of C$784.60 implies 88.5% upside potential.
Final Thoughts
In the long term, it is very likely that Shopify will continue to see significant growth and reward patient investors. However, the stock is likely to continue seeing a lot of volatility as inflation continues to run hot.
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