Shopify (SHOP 1.26%) is starting 2022 on a sour note. The stock is down 25% already in the new year. The e-commerce enabler has been a prime beneficiary of the coronavirus pandemic as millions of folks looked to shop online.
As economies started reopening in 2021, Shopify started losing momentum. Still, the longer-run trend of more shopping moving online is unlikely to reverse. So, down 25% already in 2022, is Shopify stock a buy?
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Shopify is demonstrating excellent operating performance
The coronavirus pandemic wasn't the beginning of Shopify's success. The company was rapidly growing revenue even before the outbreak of COVID-19. Indeed, from 2012 to 2019, revenue exploded from $24 million to $1.6 billion. Entrepreneurs of all sizes have chosen Shopify for their business needs throughout the decade.
Shopify has plenty of runway to continue despite the meteoric rise in revenue. According to Shopify, it is addressing a $153 billion market. Already, it has claimed the second position in U.S. retail e-commerce sales, behind the giant Amazon (AMZN 1.49%). Interestingly, some businesses prefer Shopify over Amazon because of more favorable terms and the absence of a conflict of interest. Since Amazon sells its own branded products alongside third-party sellers it can, in many cases, act as competition to the vendors on its platform.
Entrepreneur enthusiasm for listing on Shopify can be observed through gross merchandise value, which rose from $15.4 billion in 2016 to $119.6 billion in 2020. Shopify helps merchants establish a professional online presence with little capital expense. It removes a barrier of entry by switching what used to be a considerable upfront expense for businesses into a monthly subscription.
Moreover, revenue growth translates into gross profit growth, demonstrating economies of scale. Adjusted gross profit increased from $210 million in 2016 to $1.57 billion in 2020. Shopify's expenses are primarily fixed in nature; think offices, employees, etc. Therefore, when revenue grows, it scales across the fixed base and expands profits.
Longer-term, Shopify has opportunities for revenue growth in international expansion and the continued shift of retail spending to online channels.
Is Shopify stock expensive?
Interestingly, even though Shopify stock is down 25% year to date, it's up an incredible 3,900% in the last decade. But the fall has nearly cut its price-to-sales ratio in half, from over 60 to 31. At that level, it's still higher than the average it traded for in the 10 years before the pandemic and substantially higher than e-commerce peer Amazon's price-to-sales ratio of 3.5. Certainly, Shopify earns a premium valuation considering its much faster revenue growth, but a nearly 10x premium over Amazon may be a bit stretched.
However, when you compare the two retail giants on price to earnings, Amazon is trading at a premium at 61 versus 38. So, overall, when looking at valuation metrics, Shopify does not look expensive. What's more, its excellent operating performance justifies a premium price. Investors can feel good about adding Shopify to their portfolios in 2022.
