Analyzing Shopify's Potential as a Stock Investment

Transformation is a critical stage for any company, and investors should pay close attention to these changes to assess their impact on the business. For Shopify, a leading e-commerce solution provider, shedding its unprofitable logistics arm has been a positive move, signifying a critical improvement in its business model.

Shopify has decided to concentrate on its core strengths, which include e-commerce software and payment processing services. This strategic refocus has begun to pay off, evidenced by the company's recent performance. But the question on many investors' minds is whether these improvements make Shopify's stock a smart buy at this moment.

Shopify Shines Brighter Post-Logistics

Shopify's suite of tools enables small to medium businesses to compete in the vast e-commerce landscape by aiding in website creation, inventory management, product shipping, and payment processing. For a starting price of just $39 a month, entrepreneurs can launch their online stores, tapping into Shopify's robust ecosystem.

The company's decision to sell its logistics division to Flexport has led to a noticeable decrease in operating expenses and has helped Shopify report operating profits, thus stirring a positive reaction from the stock market. The stock saw a nearly 20% rise following its earnings report in early November.

A key growth indicator for Shopify is its revenue, which saw a 25% increase to $1.7 billion in the third quarter, with the bulk of it coming from merchant solutions. It's important to highlight that this impressive growth rate does not even factor in the revenue from the now-divested logistics division. Considering this, the actual growth rate climbs to an even more striking 30%.

The removal of the logistics arm has been met with enthusiasm from investors, and there's an expectation for this positive trend to continue, with Wall Street analysts predicting around 19% growth in 2024. However, does this potential for growth justify Shopify's current market valuation?

The Valuation Conundrum

Without a profitable track record over the past year, traditional profitability metrics like the price-to-earnings (P/E) ratio are not applicable for evaluating Shopify. Instead, looking at the price-to-sales (P/S) ratio can provide better context. Compared to historical data and disregarding the surge during the COVID-19 pandemic, Shopify's current 14 times sales valuation is more affordable than it was before 2018.

Yet, the expectation of growth is not as high as it was in the past, rendering some investors cautious about paying a high price for the stock given its current valuation and gross margin considerations. Unlike pure software-as-a-service companies boasting gross margins around 53% in Q3, Shopify has a cap on its profitability potential, making its 14 times sales valuation appear steep relative to its intrinsic value.

The decision to invest in Shopify stock depends on an individual's risk tolerance. While Shopify is projected to grow in the coming years, it is the rate of growth that will determine whether it can outperform the market and justify its premium valuation. Investors should weigh these factors carefully in making their investment decision.

Shopify, Investments, Stock