Investing in Shopify (SHOP) stock may bring some challenges at the current stage of the company's development. Although the share price peaked more than three years ago, it is currently trading at more than a 60% discount to its 2021 highs, suggesting that it may still not be too late to invest.
On the other hand, the bull market in 2021 boosted stock values to levels that were not justified by the real performance of firms, which means that historical highs are not an appropriate indicator. Moreover, since the bear low in 2022, stock prices have nearly tripled, suggesting that their value may have exceeded their fundamentals.
With a current price of about $74 per share, it's questionable whether investors have missed an opportunity or if it's the right time to add Shopify to the portfolio.
State of Shopify
Shopify started out as one of many online e-commerce platforms. These ecosystems appeal to merchants who want to work independently instead of relying on giants like Amazon.
However, Shopify faces stiff competition from Wix, Squarespace, Adobe and others. Despite this, Shopify has built competitive advantages that set it apart from other platforms.
One of them is a platform with no coding knowledge required that allows entrepreneurs to create a customizable website for online sales without IT experts. In addition, the company focused on the speed of its site, which appealed to marketers because of the efficiency.
Shopify also extended its competitive advantage with additional services such as online marketing, capital raising tools and inventory management that supported online sales.
Unfortunately, Shopify stock has suffered in recent years after the company unsuccessfully tried to build a logistics division. Although successful order fulfillment and shipping would have extended competitive advantages, the high fixed costs of creating this network hurt the company's financial results.
This led to a return of losses and a significant decline in the value of the shares. Eventually, the logistics division was sold, triggering a slow recovery in both the company's financial results and shares.
Financial results
Fortunately, Shopify's financial situation is improving. In the first six months of 2024, the company generated $3.9 billion in revenue, a 22% increase over the same period last year.
The company was also able to control the growth in production costs and reduce operating expenses, beyond the large write-down associated with the sale of the logistics business last year.
As a result, the net loss for the first half of 2024 was "only" $111 million, down significantly from more than $1.2 billion in the same period a year ago. Moreover, with a net profit of $170 million in the second quarter, Shopify could soon return to sustained profitability.
Still, these developments have not helped the stock significantly so far. They have risen less than 10% over the past 12 months.
However, it's important to mention that the price-to-sales (P/S) ratio is around 11, which is historically low for Shopify. This suggests that if market sentiment improves, there could be significant upside to the stock. With profitability looming, now may be a good time to be optimistic about Shopify stock.
Is it too late to invest?
Given Shopify's growth and valuation, it's likely that investors may not yet miss their chance to buy this stock.
It is far from its all-time high, though, and the company's current financial results give no reason to believe it will return there anytime soon.
However, Shopify has built a competitive advantage in a crowded industry thanks to its fast, easy-to-use platform and extensive ecosystem.
Moreover, with a relatively low P/S ratio of around 11, the market is valuing Shopify at a level from which its rapidly growing revenues and return to profitability could attract more investors. Expected growth and increasing profits could push the stock price up over time.
Zdroj: Private Brokers
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