Shopify Stock Is a Mixed Bag

Stocks to sell

The outlook of Shopify (NYSE:SHOP) stock is mixed. On the positive side, the company is growing quickly, showing that its niche is still expanding. Additionally, by some measures, it is profitable. Moreover, its chief executive officer (CEO) recently bought a large amount of SHOP stock, suggesting that he has a great deal of confidence in the company’s long-term outlook. And finally, the stock’s valuation has dropped sharply and e-commerce might be revitalized in the second half of the year.

But on the other hand, the company’s growth has slowed markedly. Its profitability has been declining in recent quarters and its valuation is still very high. Cumulatively, I think that there are several much more attractive stocks in the e-commerce space than Shopify. I still recommend that investors avoid the name.

Ticker Company Price
SHOP Shopify Inc. $33.04

Shopify’s Strengths

In the first quarter (Q1), the company’s sales jumped 22% year-over-year (YOY) to $1.2 billion. And in the previous quarter, its revenue soared 41% to $1.38 billion. In Q1, Shopify’s operating income, excluding certain items, came in at $32 million.

Similarly, in Q4, its sales jumped 41% YOY to $1.38 billion, while its adjusted operating income was $130 million. Meanwhile, Shopify’s CEO, Tobi Lütke, recently obtained about $10 million of SHOP stock. The move indicates that Lütke is quite bullish on Shopify’s longer term outlook.

As I’ve written in the past, I believe that e-commerce may be poised to rebound significantly in the second half of the year after the pent-up demand for travel and experiences eases.

Finally, after SHOP stock tumbled 80% since peaking in November, the company’s valuation has become much more palatable. In the wake of their split, the shares have become more attractive to many retail investors.

Shopify’s Weaknesses

The company’s growth has slowed meaningfully. In 2021, its sales jumped nearly 60%. In Q1 and Q4, conversely, its sales climbed 22% YOY and 41% YOY, respectively. The extent of the deceleration leads me to believe that Shopify could be losing market share to a number of its competitors, including Block (NYSE:SQ) and Wix.com (NASDAQ:WIX).

On the profitability front, Shopify’s income from operations sank to $14.4 million in Q4, way down from $117.5 million during the same period a year earlier. Meanwhile, in Q1, it reported a loss from operations of $98 million versus a profit from operations of $119 million during the same period a year earlier.

SHOP stock hasn’t become cheap either. In fact, its current forward price-to-earnings ratio, according to Yahoo Finance, is a huge 500, while its trailing price-to-sales ratio is a still-hefty 8.28.

Better Bets in the E-Commerce Space

Amazon’s (NASDAQ:AMZN) cloud business is still growing rapidly and gives AMZN stock a big profitability kicker that Shopify lacks. Additionally, given Amazon’s unparalleled share of the e-commerce sector, it’s much less vulnerable to competition than Shopify.

As the leader of the digital payments space, PayPal (NASDAQ:PYPL) is well-positioned to benefit from a rebound of e-commerce and is also less likely to be hurt by competition than Shopify. PYPL stock now has a forward price-to-earnings ratio of just 18.38

Overall, I think there are better bets in the e-commerce space than Shopify.

On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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