Over the past three years, the trajectory of Shopify stock has been far from steady. The e-commerce-software firm experienced a dramatic surge in share value during the pandemic, reaching a peak that was five times higher than its lowest point. This remarkable growth was fueled by the increasing number of sellers who turned to online stores for their goods and services. However, as the economy reopened, Shopify stock (ticker: SHOP) lost all its momentum and more, plummeting by 73% and becoming one of the worst performers of the year.
Nevertheless, this year brought about another reversal in fortune for Shopify stock. The company decided to abandon its costly venture into logistics, resulting in a 20% reduction in staff. Alongside this strategic shift, Shopify added new artificial-intelligence functionalities to its software. This move, coupled with stabilizing fundamentals and effective cost-control measures, contributed to a noteworthy rally of nearly 100% in the stock’s value.
However, Evercore analyst Mark Mahaney has recently downgraded his rating on Shopify stock from Outperform to In Line. Despite maintaining a target price of $69, approximately the same as the stock’s closing level on Monday at $68.68, Mahaney believes that the stock’s appeal has diminished. While acknowledging the well-deserved rally this year, driven by improved fundamentals and a shift away from a fully integrated shipping and logistics business model, Mahaney sees limited future catalysts for further growth.
In conclusion, Shopify stock has experienced significant fluctuations, with periods of immense growth followed by steep declines. The company’s recent strategic decisions have helped regain market confidence, leading to a substantial rally in its stock value. However, analysts like Mahaney remain cautious about its future prospects, citing a lack of clear catalysts for further advancement.
Mahaney, a well-known analyst, points out that Shopify’s stock is currently trading at approximately 11 times forward sales, making it higher than most other internet stocks he tracks. The only exception is Trade Desk (TTD), an online advertising platform that boasts significantly higher profit margins compared to Shopify. Interestingly, Mahaney mentions that Shopify’s stock is priced at over 100 times the expected 2024 Ebitda (earnings before interest, taxes, depreciation, and amortization).
Upon analyzing a group of software stocks with similar scale and revenue growth, Mahaney uncovers that this cluster typically trades at a range of nine to 11 times the estimated 2024 sales. In his view, this data does not warrant further upward movement in SHOP shares. Moreover, the basket of software stocks demonstrates far superior gross margins (ranging from 75% to 85%) in comparison to Shopify’s 48%.
Overall, Mahaney attributes the downgrade to a valuation assessment. He suggests that investors seeking a more reasonably valued online retail investment should consider Amazon.com (AMZN), which is currently trading at roughly 2 times forward sales.