If the Market Is Changing Its Mind About Shopify, Should You Buy?

E-commerce platforms Shopify (SHOP -1.77%) has seen its shares jump some 10% this past month even as the broader market has remained about flat — and there does not seem to be any obvious catalyst. So curious investors may wonder why. Of course, stocks can rise or fall for a variety of reasons, so let’s take a closer look at the company to see what might be behind the recent stock move.

What happened with Shopify

Admittedly, investors can only guess what has been happening to the internet and direct marketing retail stocks in recent weeks. Shopify’s stock price increase comes at a time when neither it nor analysts have released any news about the company.

Still, investors know that Shopify is in the midst of a recovery from 2022. During that year, people began turning away from online shopping as previously locked-down customers returned to more of their offline shopping options. A sluggish economy also slowed the growth rate.

Company revenue increased by 21% in 2022, rising to $5.6 billion. That came in well below 2021 revenue growth levels of 57%. Moreover, operating expenses rise much faster than revenue. Consequently, Shopify reported a $3.5 billion loss in 2022, down from a $2.9 billion profit in 2021.

Amid such a performance, Shopify stock lost three-fourths of its value in 2022. Indeed, the dramatic shift from significant profits to massive losses likely shocked some investors.

Those results weighed on the stock as a rally in January reversed itself in February amid the fourth-quarter 2022 earnings report. Lower 2023 guidance also led to some selling in the stock. But as investors moved past the news in March, they again bid the stock higher.

Amidst these various moves, the stock’s valuation has come way down. Last October, the price-to-sales (P/S) ratio fell to 6. While that is not an unusual level for many stocks, it matched all-time lows for Shopify. It was also a dramatic reversal from the previous bull market, when the P/S ratio had occasionally exceeded 60.

Chart showing Shopify's PS ratio falling in early 2022 and remaining low.

SHOP PS Ratio data by YCharts

Building out its network could pay off

Shopify is in the midst of building the Shopify Fulfillment Network (SFN), which has been claimed and will continue to claim massive amounts of capital. Except for Amazonsno competitors operate a logistics network, giving Shopify a sustained competitive advantage.

The overall ecosystem also continues to expand. While it has always offered subscription services for online business platforms, the fastest-growing part of Shopify’s business is merchant services.

That includes the aforementioned SFN and includes services for marketing, payments, and inventory tracking. Thanks to those offerings, Shopify can help with customer insights, handle payments for any customers who have ever bought on a Shopify-supported site, and even track inventory not sold on a Shopify site. Such functionality can make Shopify valuable to any retailer involved in e-commerce.

Should investors consider Shopify?

Despite the recent surge in the stock price, Shopify is still a likely buy as it continues to be a great growth stock. Revenue growth has continued despite a sluggish economy. While it is again reporting losses, the massive investments Shopify has made in itself are the likely reasons why. This should please long-term-minded investors as the trend toward increased online shopping will likely continue.

Additionally, the P/S ratio is low by historical standards, and if the stock price continues to rise, investors may not see a valuation that is low again for many years.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in Shopify. The Motley Fool has positions in and recommends Amazon.com and Shopify. The Motley Fool has a disclosure policy.

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