SHOP - Shopify: A Fantastic Business At An Extravagant Price Tag (Rating Downgrade)
2024-02-16 08:00:00 ET
Summary
- For Q4 2023, Shopify reported strong growth in GMV, revenue, and profits amid robust consumer spending during the holiday season.
- In my view, Shopify has a clear business moat and years of profitable growth ahead of itself.
- Unfortunately, Shopify is priced for perfection and more. On the back of a +35% move in three months, SHOP's 5-year expected CAGR return has dropped to -0.2% (dead money territory).
Introduction
Back in early-November, I rated Shopify Inc. (SHOP) a "Hold", citing its steep valuation and unfavorable long-term risk/reward:
Shopify: A Fantastic Business At An Extravagant Price Tag (Rating Downgrade)At my investing group, we own a 2.1% position in SHOP within our Moonshot-Growth strategy. Shopify's merchant-focused commerce enablement platform is best-in-class, and its moat is getting stronger with each passing quarter.
While I am thoroughly impressed with Shopify's stronger-than-expected Q3 results, the risk/reward for SHOP stock is unattractive at this time due to its premium valuation. Ahead of a potential recession, paying a 30-40% premium for any business is not a wise decision, even for a high-quality company like Shopify. Hence, I suggest staying on the sidelines on SHOP until the risk/reward improves significantly via a price or time correction. If Shopify's 5-year expected CAGR climbs back above 15%, I would happily add more shares to our long position.
Key Takeaway: I rate SHOP "Neutral/Hold" at $61.5 per share.