Shopify Stock: Where Does its Share Value Come From?

Shopify stock (TSX:SHOP)(NYSE:SHOP) is a top-performing tech stock, but is a share price in the four-digit range the true value of this company?

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Shopify (TSX:SHOP)(NYSE:SHOP) has been probably the biggest winner of the TSX today in the last five years. Shares of Shopify stock are up 5,742% since coming on the market at $35 per share back in 2015. Today, if you want to pick up a share of Shopify stock, it’s going to cost you $1,837. But that’s still down from all-time highs over $2,000 just a few months back.

But here’s a question for you: where does that number even come from? There are lots of e-commerce companies around these days, and Shopify stock is just one of them. In fact, it’s far from being the biggest. With a market cap of $229 billion, sure it’s huge. However, Amazon is at a whopping $1.7 trillion, and even Alibaba is double at $469.6 billion.

And while Amazon trades at US$3,438 at writing, Alibaba trades at just $172. So where on earth does this massive share price even come from? And should Motley Fool investors be concerned about growth, or tanking from Shopify stock?

What analysts say

There are currently 43 analysts that have weighed in on the share price of Shopify stock. Overall, 14 say investors should hold the stock, 22 say buy it, five say it’s a strong buy and two say it’s a strong sell.

This is already a huge improvement from just before the pandemic when analysts were telling investors to dump the stock. The main reason? A potential market crash. This again was before COVID-19 was even hitting headlines, leaving analysts doubting the company’s survival.

Fast forward and as you know, shares skyrocketed. After falling with the market by 33% during the March 2020 crash, shares exploded almost immediately. The surge in e-commerce use during COVID-19 made Shopify stock soar and expand its base even further. Local businesses needed to sell to stay afloat, and Shopify stock offered a simple way to do that, with analytics and online sales soaring.

What about today?

Shopify stock remains a strong performer, even with analysts worrying the company couldn’t keep up with the pace. During its last earnings report, Shopify reported achieving total revenue of over $1 billion for the second quarter for the first time, up 57% year over year. Furthermore, subscriptions solutions revenue was up 70% year over year, and monthly recurring revenue increased 67% year over year.

This quarter saw the expansion of its fulfillment network and the availability of Shop Pay. As for the next quarter, due next week, Shopify stock remained consistent with its expectations from February. While they don’t expect as much growth as they saw in 2020, they still expect rapidly growing revenue. Therefore, analysts believe its full-year 2021 operating income should be above 2020 levels.

Where the share price comes in

The reason I outlined all of this is that you need to take it all into account to make sense of the share price. The main point here is that Shopify stock has zeroed in on the growth and personality of local business, but taken an Amazon and Alibaba approach to it. It has the scale of these companies, but local businesses can put their face on it, not Shopify’s.

This makes it unique, and unique means a solid moat. And of course, that then comes down to what investors are willing to pay for that moat, and in the case of Shopify stock that’s a lot. Not as much as Amazon, but still.

Now if you look at its true cost, that would be its price-to-earnings ratio, and that’s incredibly high. Shopify stock currently has a P/E of 73, still far below its April levels of 470 and only slightly higher than Amazon at 59.88 P/E.

While Amazon remains a top competitor, with an entire team dedicated to fighting back Shopify stock, it remains at a competitive advantage as it can buy, pack, ship, and pay all on one platform.

So yes, Shopify stock is expensive. But in the case of this company, even analysts have to admit it’s worth the price. While the growth in share price certainly has levelled off, Shopify stock seems to now be a solid long-term hold that has more room to grow.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Amy Legate-Wolfe owns shares of Shopify. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Amazon, and Shopify. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify.

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