Shopify (NYSE: STORE) is starting 2022 on a sour note. The stock is down 25% already in the new year. The e-commerce facilitator has been one of the main beneficiaries of the coronavirus pandemic, as millions of people sought to shop online.
As economies began to reopen in 2021, Shopify began to lose momentum. Still, the long-term trend of more shopping being done online is unlikely to be reversed. So, with a 25% decline already in 2022, is Shopify stock a buy?
Shopify is showing excellent operational performance
The coronavirus pandemic was not the start of Shopify’s success. The company was rapidly growing revenue even before the COVID-19 outbreak. In fact, from 2012 to 2019, revenue skyrocketed from $24 million to $1.6 billion. Entrepreneurs of all sizes have chosen Shopify for their business needs throughout the decade.
Shopify has a long way to go despite the meteoric rise in revenue. According to Shopify, it is targeting a $153 billion market. It has already claimed the second position in US e-commerce retail sales, behind the giant Amazon (NASDAQ:AMZN). Interestingly, some companies prefer Shopify over Amazon due to more favorable terms and the absence of a conflict of interest. Since Amazon sells its own branded products alongside third-party sellers, it can in many cases act as competition for vendors on its platform.
Entrepreneurs’ enthusiasm for listing on Shopify can be seen through gross merchandise value, which increased from $15.4 billion in 2016 to $119.6 billion in 2020. Shopify helps merchants establish a professional online presence at a cost of minimum capital. It removes a barrier to entry by turning what used to be a hefty upfront expense for businesses into a monthly subscription.
Additionally, revenue growth translates into gross profit growth, demonstrating economies of scale. Adjusted gross profit increased from $210 million in 2016 to $1.57 billion in 2020. Shopify’s expenses are primarily fixed in nature; think of offices, employees, etc. Therefore, when revenue grows, it scales through the fixed base and expands earnings.
Longer term, Shopify has revenue growth opportunities in international expansion and the continued shift from retail spending to online channels.
Are Shopify Stocks Expensive?
Interestingly, while Shopify’s stock is down 25% year-to-date, it’s up an incredible 3,900% in the last decade. But the drop has nearly cut its price-to-sales ratio in half, from more than 60 to 31. At that level, it’s still higher than the average it traded for in the 10 years before the pandemic and substantially higher than electronic commerce. Amazon price-to-sales ratio of 3.5. Certainly, Shopify gets a higher valuation considering its much faster revenue growth, but a nearly 10x premium over Amazon might be a bit of a stretch.
However, when you compare price to earnings for the two retail giants, Amazon trades at a premium of 61 to 38. So overall, looking at the valuation metrics, Shopify doesn’t look expensive. In addition, its excellent operating performance justifies a higher price. Investors can feel good about adding Shopify to their portfolios in 2022.
This article represents the opinion of the writer, who may disagree with the Motley Fool premium advice service’s “official” recommendation position. We are motley! Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
George is Digismak’s reported cum editor with 13 years of experience in Journalism