Shopify (TSX:SHOP) rallied nearly 11% yesterday on news that it had raised prices on most of its subscription services. The stock’s biggest move in several months, it was a real vote of confidence from investors. Shopify got beaten down badly last year due to its decelerating revenue growth, but its recent moves have increased investors’ confidence.
With prices going up, Shopify may be able to increase its revenue growth. It’s unlikely that the 90-100% growth rates observed during COVID-19 lockdowns will return, but something faster than last quarter’s 22% is possible. For this reason, I would consider investing in Shopify if it went low enough. I wouldn’t buy it today, but I’d probably buy it if it dipped below $30, for reasons I will outline in the paragraphs below.
Why Shopify rallied today
It might seem surprising that Shopify rallied 11% today, given that its earnings are still more than two weeks away. It’s not unheard of for such big moves to occur when companies put out good earnings, but this quarter’s release isn’t coming out until February 15.
So, what got SHOP stock moving today?
Most likely, it was the price hike alluded to earlier. Going forward, the company will be charging the following:
- $39/month for the basic plan
- $105/month for Shopify (the intermediate level plan)
- $399/month for the advanced plan
These are significant increases from the current prices. Basic is only going up by a dollar a month, but the other two plans are going up by $10 per month. So, there could be a significant revenue impact here.
With that said, I’m not sure that this plan necessarily warrants a 10% swing in SHOP’s stock price. The percentage increases here are less than 10%; on the basic plan, the increase is only 2.6%! The revenue impact here will be somewhere between 5% and 10% at an absolute maximum. That’s not nothing, but it will not take Shopify back to the kind of growth it experienced in 2020 and 2021.
Why $30 is a good entry point
As we’ve seen, Shopify is raising its prices and is soon to release earnings. For me, this leads to one conclusion: the stock is a buy below $30.
Why do I aim lower than today’s price when the latest news was good?
It has to do with uncertainty regarding next quarter’s earnings. Shopify’s last two earnings releases showed revenue growth of 16% and 22%, and negative earnings. Even if Shopify’s price hikes get growth up from 22% to 25%, we’re still looking at a very expensive stock at 10 times sales. So, I’d like to see the price come down quite a bit before I’d buy it.
What a year it’s been for Shopify. After several weak earnings releases and a major stock crash, the company is rising from the ashes and raising its prices. Shopify’s management appears to be quite confident in the company’s future. This stock is definitely a worthy pick for the right person. For me personally, I’d like to see a price below $30.