Shares of Canada’s e-commerce giant Shopify (TSX: SHOP)(NYSE:SHOP) have been on an absolute tear since it went public back in May 2015. The stock has returned over 5,500% since its IPO, which means early investors could turn a $1,000 investment into a staggering $56,000 over the years.
This stellar rise in Shopify’s stock price has meant it is now Canada’s largest company with a market cap of $147 billion. However, the recent sell-off in equity markets this month has meant that the stock is also trading 20% below its record high. Let’s see if this correction makes Shopify a good bet right now.
Shopify stock remains a solid long-term bet
Shopify is the poster child of the COVID-19 pandemic and has benefited by a change in consumer buying patterns. The pandemic has acted as a tailwind for e-commerce companies, as people had no option but to shop online as retail outlets were closed amid countrywide lockdowns.
According to a Statista report, e-commerce sales in Q2 accounted for 16.1% of total retail sales in the U.S., up from just 11.3% in the fourth quarter of 2019. Shopify sales in Q2 rose by a staggering 97% year over year, as the gross merchandise volume on its platform surged higher by 119%.
As the dreaded coronavirus decimated the traditional retail space, several mom-and-pop stores had no option but to move online. The number of merchants on the Shopify platform rose by 71% year over year in Q2. Shopify’s intuitive digital storefront combined with its 90-day free trial offer also contributed to this influx in merchant growth.
The company’s strong revenue growth also helped the company generate a Q2 net profit of US$36 million, up from a net loss of US$28 million in the prior-year period.
Analysts tracking Shopify expect the company’s sales to grow by 65% year over year to US$2.6 billion, while its earnings per share are expected to rise by a massive 717% in 2020.
We can see Shopify’s forward price-to-sales multiple of 43 and its price-to-earnings multiple of 371 is supported by strong growth estimates.
The e-commerce giant should be bought on major price corrections
Shopify will continue to benefit from secular growth trends in the online segment, as the global e-commerce spending is expected to double by 2027 to reach $27 trillion in total value, according to a Grand View Research report.
Yes, there is no doubt that Shopify stock is trading at lofty valuations, despite a 20% decline in share prices. There is also a good chance for the stock to move lower if the market turns bearish in the last quarter of 2020.
However, it is impossible to time the market, and long-term investors need to view every major price correction as a buying opportunity. If Shopify stock moves lower, you can continue to buy shares at a lower multiple and average out your losses.
Shopify sales are expected to touch US$18 billion by 2024, and if the stock is valued at 20 times sales, your investment can easily triple from current levels.
