There’s no stopping the e-commerce freight train that has been growing at double-digit rates since the invention of the internet. Shopify (SHOP) is an innovative leader in the e-commerce space that has produced fantastic growth rates. Despite this, I am bearish on SHOP stock.
Shopify is a Canadian multinational e-commerce company headquartered in Ontario. The Shopify platform offers online retailers a suite of services, including payments, marketing, shipping, and customer engagement tools.
The company reported that it had more than 1,700,000 businesses in approximately 175 countries using its platform. This includes over 1.6 million websites run on the Shopify platform as of 2021.
The total Gross Merchandise Volume exceeded $162.4 billion for the last twelve months. At one point, Shopify was the largest publicly traded company in Canada as ranked by market cap. Total revenue in the last 12 months was US$4.2 billion.
Shopify offers an e-commerce platform primarily to small and midsize businesses. The firm has two segments: Subscription Solutions (30% of revenues) and Merchant Solutions (70% of revenue).
The subscription solutions segment allows Shopify merchants to conduct e-commerce on a variety of platforms, including the company’s website, physical stores, pop-up stores, kiosks, social networks, and Amazon. Merchant solutions are add-on products for the platform that facilitate e-commerce activity and include Shopify Payments, Shopify Shipping, and Shopify Capital.
Shopify continued its strong growth trends in the third quarter of 2021 as revenues increased 46% to $1.1 billion. Subscription solutions increased 37% as more merchants joined the platform. In addition, the Merchant solutions segment increased 51% due to higher merchandise volume. Monthly recurring revenue (MRR) as of the end of the quarter was $98.8 million, an increase of 33%.
Gross Merchandise Volume (GMV) increased 35% to $41.8 billion, and Gross Payment Volume (GPV) grew to 49% of GMV, or $20.5 billion.
Adjusted operating income, excluding unusual charges, was $140 million, a 12% operating margin. At the end of the quarter, the company had $7.5 billion in cash and short-term investments on the balance sheet. Debt balances totaled $910 million, which was comprised of senior convertible notes.
Shopify is profitable and expected to earn $7.91 in Fiscal Year 2021 and $8.64 in 2022, according to analyst estimates. That puts SHOP’s P/E ratio in the triple-digits. The EV/sales ratio is even more extreme and has the company selling at 32x 2021 estimated revenues and 24x 2022.
The information technology industry median is 4.4x for 2021. It’s hard to determine a fair value for Shopify as even using a discounted cash flow calculation requires a leap of faith of very high long-term growth rates. Let’s just say the fair value for SHOP stock is almost certainly significantly lower than today’s price, in my view.
Wall Street’s Take
Turning to Wall Street, SHOP stock has a Moderate Buy consensus rating based on 13 Buys and nine Hold ratings assigned in the past three months. At $1616.84, the average Shopify price target implies 50.7% upside potential.
I am bearish on SHOP, not only because of extreme valuations, but it also faces reverse pandemic headwinds as shoppers head back to physical stores after the once-in-a-lifetime pandemic lockdown boom.
E-commerce certainly has a strong future globally for decades to come, but buying a company at a triple-digit earnings multiple still doesn’t make for a great investment premise.
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