It’s hard to believe that Shopify (TSX:SHOP) stock has surged nearly 150% since bottoming out back in October 2022. With the U.S. Federal Reserve on a “hawkish pause” of sorts, with no hikes in its latest meeting, tech may very well have further room to heal after last year’s painful fall.
Understandably, Shopify stock remains a tough name to value at around 14.2 times price-to-sales (P/S). That’s still quite expensive for an e-commerce company going into a recession. Though the more challenging economy will weigh on top- and bottom-line growth, I’d argue that the coming year represents a true test for Shopify.
Given recent moves, I’d argue the company has already prepared for the harsher environment. And if it’s able to continue bettering itself via innovation and operational-efficiency driving measures, I’d look for Shopify to keep bucking the trend, even as its peers feel the increased heat that comes with a downturn.
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Shopify is on a mission
Every wonderful business needs to prove itself to investors in the gloomy times. The economy doesn’t always fire on all cylinders, and markets don’t always gravitate higher. Although it has been a devastating fall for Shopify investors who bought at more than $200 per share, I’d argue that there may be plenty of reasons to stay aboard.
The current trajectory is promising, but there’s no denying that the easy money has already been made. To climb even higher, Shopify will need to execute. I believe it has all the tools to impress now that analyst estimates are relatively muted in response to today’s economic climate.
Without further ado, let’s look at four ways that Shopify could justify its 14–15 times P/S multiple, and perhaps even command a much higher multiple, say in the 20–25 times P/S range.
Success in physical commerce
First, Shopify can keep marching higher if it can continue pushing into the realm of physical commerce. The company’s new point-of-sales platform could help alleviate some of the pressures on the digital end. Of course, point-of-sales hardware and services is not an easy place to thrive in these days. Not with the growing number of players looking to get in on the booming payments scene.
Fortunately, I think Shopify could make good use of its already impressive ecosystem. Many merchants who trust Shopify with its online store may be more willing to trust it on the front of physical commerce. In any case, point-of-sales stands out to me as a low-risk/high-reward proposition. The company doesn’t need to break into the field to be a growth king. If it does, though, I think shares could respond very positively, even in a recession.
Innovating on the AI front
Second, Shopify needs to keep innovating when it comes to AI. Undoubtedly, there’s a lot that AI can do for tech companies, even as consumer spending sinks lower. Though Shopify has mostly experiemented with AIs (for summing up product reviews and generating product descriptions), I think Shopify may be viewed as a more AI-capable company two years from now.
Today, AI may be an experiment. In the future, it could grow to become a core growth pillar.
Embracing augmented reality innovation
Augmented-reality storefronts could be commonplace in five or more years from now, as the average consumer looks to mixed-reality headsets and other spatial computers.
It’s hard to tell when VR and AR will be in its prime. But with so many big-tech players duking it out for headset dominance, I’d argue Shopify has plenty of reason to keep betting big on the AR future of digital stores.
Pursuing strategic M&A
Finally, Shopify may wish to pursue bite-sized tech firms via M&A. Undoubtedly, an AI or AR firm may help the e-commerce giant accelerate innovation efforts and keep growth going strong for many years to come.
