Investing can be a game of patience; stocks can sometimes hold hefty valuations for months, or even years, before going on sale. E-commerce software company Shopify ( SHOP -3.61% ) was one of the big winners during COVID-19; shares rose roughly 300% from the beginning of 2020 to last fall.
But all good things come to an end, and the marketwide sell-off of growth and technology stocks over the past several months brought shares down more than 70% from their highs before bouncing over the past week.
So is it too late to buy Shopify? Or has the discount window already closed?
The stock remains beaten down
This chart shows how much of a roller-coaster ride Shopify has been for investors. If you look at the valuation using the stock’s price-to-sales ratio, it’s traveled from the 20s up to more than 60 before coming back down again. In other words, Shopify’s significant returns during the pandemic resulted from the stock becoming more expensive as opposed to growth in the underlying business itself.
Shopify’s P/S ratio fell to just under 15 at the stock’s low of just over $500 per share and remains below pre-COVID levels despite a bit of a rally over the past couple of weeks. Shopify is still less expensive (from a P/S standpoint, not the share price) than its March 2020 lows when the market panicked over the emergence of COVID-19.
Should investors be concerned about slowing growth?
Sometimes it gets harder to maintain rapid growth as a company becomes bigger. Large numbers can tilt the math against you because it’s often much easier to go from 10 to 100 than it is to go from 10 million to 100 million.
This relates to Shopify because it’s no longer an underdog story. Once upon a time, the market was skeptical of Shopify’s idea of enabling anyone to open an online store, and short-sellers even targeted the stock. But today, Shopify is a big dog that does billions in revenue and carries a market cap of almost $100 billion, even after its dramatic fall from highs.
Understandably, Shopify’s growth slowed as it got larger, aside from a massive uptick in the business during pandemic lockdowns when more people were trying to buy and sell online. This chart shows that the company’s revenue growth rate has slowed back down, falling roughly in line with the longer-term trend.
However, the stock’s valuation is about the same as when the company’s revenue was growing at a much faster rate. Today, Shopify is a consensus blue-chip growth stock with positive earnings per share, so one could argue that this would support the valuation.
On the other hand, investors hoping to buy the stock and see its valuation go back up may be disappointed because it’s unclear that Shopify can grow fast enough anymore to support a higher valuation. Analysts’ average estimates call for 30% revenue growth in 2022, which would mean that revenue growth is still slowing down considering it grew 44% in 2021.
So is the stock a buy?
The good news is that Shopify can still be an excellent, long-term investment from its current price. E-commerce still represents just 14% of total retail sales in the U.S., and Shopify has the second-highest market share, trailing only Amazon.
Analysts seem to think that revenue growth will stabilize in the 30% range, with 2023 revenue estimates calling for 32% growth. If the valuation does nothing from here and the stock appreciates to reflect its revenue growth, that’s a 30% annual return, enough to generate a lot of wealth for investors.
Even if Shopify comes up short of expectations, the stock seems like a solid bet to post double-digit returns. The valuation isn’t nearly the bargain it was near its lows, however. Investors should consider that before chasing shares at higher prices if Shopify continues to rally over the coming weeks and months.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Read More: Is Shopify Still a Buy After Bouncing From Its Lows? | The Motley Fool