Shopify is a leading e-commerce platform that enables businesses of all sizes to create an online store. Shopify Stock has been growing rapidly in recent years, thanks to the shift to online shopping. It has been one of those winner stocks during the COVID-19 pandemic as e-commerce has seen a boom.
However, in the past months, the narrative is shifting. The stocks have been sinking down, being down 77% year to date in the wake of historically high inflation levels in the US and the reopening global economy. Motley Fool defines this phase as Shopify’s dog days of summer.
Shopify registered a loss of $1.2 billion for Q2 2022 compared with an $876 million profit a year earlier. Given the current economic slowdown and broader e-commerce growth slowdown, the company warned it would post losses for the remaining 2022 as well. Total revenue rose 16% which is the slowest rate since its IPO in 2015. Operating costs, however, jumped by 75% to $845 mullion as the company expanded expenditure in areas like product development and marketing.
But has Shopify Stock really fallen that much?
Having said all that, Shopify is still a winning investment for investors. It’s still 1,200% up since the e-commerce giant’s IPO in 2015. It is true though the stocks were once up 6,000% and have tanked exponentially over the past one and a half years.
This brings us to the question: Is it the best time to buy Shopify stock?
So what’s going on here? Look at the bigger picture. Even if the stock is at its lowest, it doesn’t mean it’s cheap. If you look at the surface, Shopify stock looks like a great catch, if you consider the cheap price-to-sales ratio of 8, which is its cheapest evaluation ever. But valuation isn’t that simple and linear. For the new ones on the block, a company’s price-to-sales ratio (P/S ratio) is calculated by dividing a company’s market capitalization (the number of outstanding shares multiplied by the share price) y the company’s total sales or revenue over the past 12 months. So, a lower P/S ratio means a good investment opportunity.
Now, to understand if Shopify stock is actually cheap or not, let’s draw a parallel on the P/S ratio of Shopify and another undisputed e-commerce giant Amazon. Look at this amazing comparison drawn by Motley Fool to understand it better.
Even at its lowest, Shopify stock is thrice as expensive as Amazon stock. So the question now remains: does Shopify deserve to be picked over Amazon? A company’s fundamentals play a bigger role here.
Should you choose Shopify over Amazon?
Let’s talk about the fundamentals of the two companies here. There’s no doubt that Shopify isn’t a giant like Amazon, even though it’s growing faster. Even before the pandemic, Shopify’s revenue growth has been consistently over 30% and the COVID-19 pandemic accelerated it further.
On the other hand, Amazon has been a slow gainer, but steady it has been. One can prefer Shopify going by the revenue growth alone. If you look at this graph by Motley Fool that depicts both the companies’ YoY revenue growth over the period of 2018-22, Shopify is almost twice above Amazon.
If you look closely, you can see that Shopify’s growth has dropped steeply from the period of 2021 to 2022. The most recent quarter recorded a growth of 15%, looks fine, but if you compare it to the previous few years, it’s a far cry. In the first half of 2021 alone, it registered more than 90% of growth rate in revenue.
Amazon has also slowed down from flatlining at the beginning of 2021 to 2022. But the gap between the growth rate of both companies is smallest than ever, from being the widest in 2021.
In terms of profitability as well, Amazon is much more profitable than Shopify at the moment. Both companies have witnessed their cash flow dry up over the past year due to surging freight costs, wages, and other operating expenses. Amazon is, however, turning 7% of its sales into operating profits while the number remains 2% for Shopify. On the bottom line, Amazon is still more profitable than Shopify at $11.6 billion in net income over the past year. Shopify remains in the red.
Amazon or Shopify: The Verdict
Shopify isn’t entirely a bad choice for long-term investors. But Amazon is in a much better position today. Unlike Amazon, Shopify doesn’t have an AWS-like business that generates cash flow. Also, its increased investments might hold back its financials for a while. However, these investments are favorable for its long-term competitive positioning. So the decision of investing in Shopify or Amazon lies depends upon the investor’s investment duration. For long-term investment, Shopify is still a steal deal. Although for short-term gains, Amazon is the best option given its share prices right now and AWS.
Disclaimer: This is not an opinion or advise on Shopify stock. Users must take caution before investing.
