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.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.