Shopify (TSX:SHOP) was listed on the TSX in May 2015 at a split-adjusted price of about $3.5. Today, Shopify stock trades at $81.75. So, if you invested $1,000 in Shopify stock soon after its initial public offering, the investment would be worth close to $26,000 right now, easily outpacing the broader markets.
In fact, SHOP stock generated returns of a whopping 5,470% to shareholders between May 2015 and December 2022, making it one of the hottest tech stocks in the world.
In the last 20 months, Shopify and its tech peers have been wrestling with several macro issues that include slowing e-commerce sales, a sluggish macroeconomic environment, rising interest rates, supply chain disruptions, and elevated inflation levels.
Due to these factors, Shopify stock is currently trading 62% below all-time highs, valuing the TSX tech stock at a market cap of $105 billion.
As past returns shouldn’t matter much to current investors, let’s see if Shopify stock is a good buy today.
The bull case for Shopify stock
Shopify owns and operates one of the largest e-commerce platforms globally. It allows businesses to set up and manage online stores through its expanding portfolio of products and services.
The company has onboarded more than two million merchants on its platform, which generated around US$50 billion in gross merchandise volume in the first quarter (Q1) of 2023. Despite a slowdown in top-line growth, Shopify increased revenue by 26% year over year in 2022, and in Q1 of 2023, sales soared by 25%. Shopify stated around a fourth of total sales were subscription-based, allowing it to generate predictable cash flows across market cycles.
Moreover, Shopify is part of an expanding addressable market, as online sales in the U.S. accounted for just 15% of total sales. This number will be much lower in emerging markets and provides Shopify with enough room to keep expanding its presence geographically.
Amazon is the undisputed leader in e-commerce due to its wide reach and economic moat. But the Shopify platform provides customers with the required tools and customization to enhance their digital presence, resulting in low-switching costs and robust subscription rates.
Shopify is also focused on optimizing costs and recently sold off its loss-making logistics business, reducing its payroll by 20%.
After a difficult year in 2022, Shopify is forecast to improve its adjusted earnings from $0.05 per share to $0.44 per share in 2023 and $0.73 per share in 2024. Wall Street also expects sales to rise from $7.5 billion in 2022 to $19 billion in 2027.
The bear case for SHOP stock
Despite its drawdown from record highs, Shopify stock is priced at 11.8 times 2023 sales and 184 times forward earnings, which is very expensive. So, if there is another round of selloffs, expect Shopify stock to move significantly lower in the near term. Additionally, it competes with Amazon, which is among the largest companies globally.
The company reported a free cash flow of $86 million in Q1 and will reinvest a majority of its earnings to fuel its expansion plans. Due to its low cash flow yield and steep valuation, it makes sense to remain cautious about Shopify stock until a bull run resumes.
Analysts tracking SHOP stock have a 12-month price target of $82, which is marginally higher than its current trading price.
