Shopify (SHOP) stock price has crawled back recently, fueled by improving business conditions, a strong equity market, and the ongoing interest rate cuts by top central banks.
The stock rose to a high of $82.45, its highest level since February this year, and 236% above its lowest point in 2023. Its market cap has risen to $100 billion, still lower than its all-time high of $230 billion.
A big player in commerce
Shopify, a Canadian company, has grown to become one of the biggest players in the e-commerce industry, with millions of merchants worldwide.
It offers a platform where anyone can create an e-commerce platform and start selling almost immediately.
This business model has given it multiple ways of making money. The basic revenue source comes from the subscription businesses pay when creating an account. This subscription package starts at $29 a month and grows to $2,300 for large companies.
In addition to this, the company takes a small cut for all card transactions it processes. It also makes money by offering retailers in-person selling and logistics tools.
Shopify’s product is now used by some of the biggest brands globally, including Brooklinen, Kylie, Jungalow, and Rebecca Minkoff.
Its business boomed during the Covid-19 pandemic when most people started shopping online. The Covid-19 lockdowns also pushed many people to sell online, leading to higher subscription revenue.
Shopify’s annual revenue surged from $1.57 billion in 2018 to $4.6 billion in 2020, making it one of the fastest-growing companies in the industry.
However, like other pandemic winners like PayPal, Zoom Video, and DocuSign, its business has slowed. A key issue for Shopify is that many large companies either use its service or one of its competitors.
Shopify’s growth is still good, but concerns remain
The most recent financial results shows that Shopify’s business was doing well. Its sales jumped by 21% to $2 billion in the second quarter as the gross merchandise volume rose by 22% to $67.2 billion.
Most of this revenue came from its merchant solutions segment, which rose by 19% to $1.5 billion. Its subscription revenue rose by 27% during the quarter.
Shopify has also issued fairly conservative forward guidance, as it has done in the past. It expects its third-quarter revenue to grow by the low-to-mid twenties while its gross margins rise by 50 basis points.
Analysts expect that Shopify’s revenue will come in at $2.86 billion when it publishes them on October 25. That will be a big increase compared to the $1.8 billion it made last year.
The company’s annual revenue is expected to be $11.7 billion, a 21% increase from 2023. It will then make $14.12 billion next year. Historically, Shopify has always done better than estimates, meaning that its business will likely do well.
This revenue growth will likely be led by e-commerce transactions in key countries like in the United States. The challenge, however, there are signs that more customers prefer to buy from mainstream companies like Amazon and Walmart.
Valuation concerns remain
The biggest concern among investors for over a decade has been Shopify’s hefty valuation. Besides, this is a $100 billion company whose estimated sales in 2025 are expected to be $14.1 billion, implying a forward price-to-sales of 7.15.
Data compiled by SeekingAlpha shows that Shopify has a forward P/E ratio of 208, almost three times that of Nvidia, a company that is having a faster growth rate. Its forward non-GAAP P/E ratio is 71.
Shopify is also a bit overvalued in terms of the rule of 40, a common approach used to value SaaS companies. It is calculated by adding a company’s revenue growth rate and its profit margin. In Shopify’s case, the net income margin is 16% while its revenue growth is 23, giving it a figure of 39%.
Proponents justify the valuation metrics arguing that the company is still in its growth phase and that the situation will normalise in the future.
Besides, Shopify is the undisputed leader in the industry, with BigCommerce, another top competitor, struggling.
The challenge, however, is that investors who avoided Shopify because of its valuation have missed a substantial bull run over time.
Read more: BigCommerce vs Shopify stocks: Here’s why SHOP beats BIGC
Shopify stock price analysis
The daily chart shows that the SHOP share price has been in a slow recovery after bottoming at $23. It has soared to the current 38.2% Fibonacci Retracement point.
The stock has also retested the 38.2% Fibonacci Retracement level. It has formed an inverse head and shoulders pattern. It has also formed a golden cross pattern as the 50-day and 200-day moving averages have crossed each other.
Therefore, the stock will bounce back and retest the 50% Fibonacci Retracement point at $100, which is about 20% above the current level. This view will be confirmed if it crosses the key resistance point at $91.80.
The post Shopify stock analysis: valuation concerns remain, Oct. 25 will be key appeared first on Invezz
