Shopify Inc. (NYSE: SHOP) is in the spotlight for weaker projected growth, which strikes me as odd. That’s because the growth is still there, it just won’t be at the pace that investors have grown accustomed to over the past two years, which everyone knew were going to be outliers given the pandemic. world. Did so many people actually think what was happening in 2020 and 2021 was going to be the new normal? That we would never visit stores in person again and malls would be dead as we know them?
Obviously, that’s not the only factor at play that caused the 60% share price discount, but it seems to be a resounding theme. So the question I ask myself is, what growth rate is acceptable? Analysts still seem to believe we’ll see revenue growth of over 30% over the next few years, and as long as I do that, it’s usually enough to keep investors investing. Especially for a company whose stock price is worth as much as Shopify‘s. Therefore, I think it’s an opportunity.
What do I love about Shopify?
I may be completely out for lunch here, but I think the business is extremely attractive at current levels. We can look at the P/E, PEG and PB ratios all we want, but those haven’t mattered to investors for years. If they come back into favor, then there’s still a lot to decompress here in the whole sector. Not just about Shopify.
What I know about Shopify, and I touched on this earlier, is that growth isn’t going anywhere. Yes, we saw 85% revenue growth in 2020 as the world feared hibernation, and that was followed by 57% growth in 2021. But let’s not forget that we are now talking about a $6.05 billion company. revenues in 2022. Naturally, we expect growth to slow. Looking below, we can get an idea of what investors are looking at and why they might be upset. But in all reality, the future looks extremely attractive as far as I can see.
The only red flag for 2022 is the projected EPS. We could see it drop to $3.36, which would be a 48% drop from the $6.41 we saw posted in 2021. The good news is that it will be short-lived as analysts predict that it will drop back to $12.43 by 2025. To me, it looks like investors are shocked at how much growth targets are falling, which I would have thought was obvious. If only I put my money where I was!
The long-term thesis behind Shopify is the belief in e-commerce. We envision a market that could be worth up to $6 trillion by 2024. Now that’s global, but nonetheless, being a pretty big player in this market is a good place to be. When it comes to US e-commerce, Shopify has been the number two player for several years now, but they continue to grow. Looking below, we can see that Amazon (AMZN) continues to run away with the race to 41% market share, but Shopify is now in double digits as they gained 1.7% market share for reach 10.3% in 2021.
Now, if you isolate that to eCommerce software, you’ll see that Shopify controls 29% of the market. The next closest are WooCommerce Checkout (23%) and Wix Stores (WIX) (14%). I don’t see why they would lose an extra share. I strongly believe that based on their current projections, it will only continue to grow from here.
Just for fun, let me take a look at what the (old-school) market valuation looks like. I mentioned they didn’t really matter, and that’s because only a few months ago we saw a price at sales (P/S) at around 50x. Now we see it around 18-19x. Did this solve the problem? Some might say yes, but that doesn’t explain why it rose so much in the first place if it matters so much to investors. Personally, I attribute it to momentum. Realistically, even 18x is too high if we’re just playing fundamentals.
If you liked Shopify at $1700, then you should love it at $670. Nothing has changed. The company will continue to grow, and continue to make life easier for everyone. Although the fundamentals may indicate that it is still trading at a premium, it is hard to believe that the bottom has not been reached given the projected growth to come in the coming years. Like it or not, e-commerce isn’t slowing down.
What does the price say?
On the technical side, Shopify has been playing a T. In early February when I wrote that Shopify was at a pivot point, I posted the chart below with the 3 levels to watch. Well, sure, every line came into play. This allowed me to pick up stock under $575 as the stock bounced off my target line twice, resulting in a double bottom.
Shortly after, we saw $666.78 pass and a $775 test that was rejected. As it stands, we are using $666.78 as support. I was forced to cut some as the stock spiked on the 18th to secure profits but my current stop on what remains of these stocks sits at $625.87 as I would like to hold it at long term and I would be looking to add if we can get a good bounce off the support.
It goes without saying that if we break my stop and retest $525, I would look to buy on a bounce. I think the bottom is here, but I keep my hopes and dreams in the back seat and let the price action determine my actions.
As for the return to $1700 and beyond, it remains long. My medium term goals are set at $1020 and $1285. When are we getting there? I have no idea. We’re going to need some serious momentum both in technology and in the market in general. Looking below, we can see that these two tiers are pretty obvious to watch out for. If you wanted a short term goal, you might consider $833. That’s about 18% from our current position. But, first we need to see $775 fall.
That said, I think the chart looks quite bullish at current levels. I will continue to hold my current actions and execute the plan detailed above as long as all levels hold. I still think the market will remain volatile, and therefore stops are extremely important to hold and watch. Adjust as needed and maximize profits.
As you can see, while we may not see the numbers we saw in 2020 and 2021, we are still going to see high growth, which is exactly what investors should be asking for. I think Shopify is a name you can start adding to your long term accounts. It’s going to be a long road back to $1700 and beyond, but it’s worth the journey. The e-commerce giant will continue to expand internationally and continue to nibbling market share. This will only turn into bigger revenue as e-commerce sales continue to grow year over year. I’m in Shopify for the long haul.