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Is it a once-in-a-generation investment now?
As Nasdaq Composite Index in record territory, you might be thinking that most stocks are also near their all-time highs. But this is not the case.
To take Shopify (NYSE: STORE). As of May 15, shares of the leading e-commerce platform are currently 65% below their peak, set in November 2021. It doesn’t help that Wall Street has not been pleased with the company’s recent financial updates.
Does this discount make Shopify a once-in-a-generation option? investment opportunity right now?
Concerned about guidance
Shopify, which sells a range of hardware, software and financial services tools that enable anyone to quickly establish an online retail presence, continues to see rapid growth despite macro headwinds. Gross merchandise volume (GMV) increased 23% to $60.9 billion, also helping to generate a 23% revenue gain. This marks the seventh consecutive quarter that Shopify has recorded sales growth of more than 20% year-over-year.
So why did shares plunge 19% right after the last financial update? The market is forward-looking and management disappointed investors by forecasting “teens” sales growth in the second quarter. While this was close to Wall Street’s consensus expectations, it would represent a slowdown from recent quarters.
Think about the big picture
Investors should zoom out and try to maintain a long-term view when considering Shopify as a potential portfolio addition. There are a few key factors to consider.
Despite what could be a slowdown in sales this quarter, it’s easy to be optimistic about the business in the coming years and beyond. Shopify benefits from the continued growth of online shopping, which accounts for just under 16% of all U.S. retail spending. As more commerce is done digitally, the company stands to gain as it has a 10% global market share. e-commerce platform market.
Growth could accelerate as it begins to further penetrate the market for enterprise customers. Additionally, Shopify is making inroads into offline retail. The disadvantage of this approach is that competition will only intensify, from companies like Adyen, PayPal, Blockand stripe.
But it’s not hard to believe that Shopify has become a mission-critical service provider for its millions of customers, who depend on it to ensure their operations run smoothly. This is only expected to be expanded as the business is intensely focused on ongoing product development efforts.
It’s no news that artificial intelligence (AI) is a top priority. With Shopify Magic, merchants can use AI-powered tools to better edit images, write product descriptions, and compose emails. This can lead to better financial success for merchants, which could ultimately increase GMV and revenue potential.
The story continues
The company was able to better monetize its platform, as exemplified by a 3.06% adoption rate in the first quarter (revenue divided by GMV), which has increased steadily over the last five years. This is a clear sign of the value Shopify offers its customers.
High expectations
It’s not difficult to convince someone that this is a quality business with huge growth potential. The point, however, is that this optimistic outlook is fully reflected in the share price, despite it being far from its peak.
Shares trade at 10 times sales. While that’s a drop from the price-to-sales ratio of 17 just three months ago, the valuation still tells me that investors have high hopes for the business and the stock. Not only does this increase the risk if Shopify continues to report financial updates that are not well received, but it also limits the upside of sizable investment returns.
This is not a once-in-a-generation purchasing opportunity. But if investors like the business, then it’s better to wait until there is a better entry valuation, in my opinion.
Should you invest $1,000 in Shopify now?
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Neil Patel and its clients do not have a position in any of the stocks mentioned. The Motley Fool has positions and recommends Adyen, Block, PayPal and Shopify. The Motley Fool recommends the following options: June 2024 short calls for $67.50 on PayPal. The Motley Fool has a disclosure policy.
1 Growth Stock Dropped 65%: Is It A Once-in-a-Generation Investment Now? was originally published by The Motley Fool