CA - Shopify: Bull Run Is Likely Over

2023-09-27 12:00:00 ET

Summary

• Shopify Inc. stock has experienced a bull run and outperformed the market over the last year.
• The partnership with Amazon could be a growth catalyst for Shopify.
• However, the current macro and valuation headwinds suggest that the bull run is likely over, and it may be better to wait for a greater pullback before investing in Shopify.

Shopify Inc. ( SHOP ) stock has greatly appreciated in recent quarters, but now there are questions about whether its shares have any upside left given the macro and valuation risks that are making the company less attractive to own. Even though it seems that Shopify’s business will continue to grow, there are reasons to believe that a short to near-term contraction of its share price is on the horizon.

Shopify Continues To Exceed Expectations

Let’s start with the good thing. Back in March, I wrote an article in which I explained that Shopify’s stock is likely going to experience a bull run due to several growth catalysts that could improve the underlying business and make the street more excited about the company’s prospects. That’s exactly what happened, and since that time Shopify’s shares appreciated by ~15% and outperformed the market.

What’s more, is that the Q2 numbers that were released last month showed that Shopify’s growth story is far from over. In Q2 its revenues increased by 31% Y/Y to $1.69 billion and were above the estimates by $70 million. At the same time, the non-GAAP EPS of $0.14 was above the estimates by $0.09 as well, while the gross merchandise volume was up 17% to $55 billion.

Another important development happened a few weeks ago when Shopify gave the ability to its U.S.-based merchants to add Amazon’s ( AMZN ) Buy with Prime feature to their stores. Previously, the company prohibited this feature and stated that those merchants who use it in their stores are in violation of Shopify’s terms and conditions. This is likely due to the fact that the company feared that it would lose a significant portion of its business as merchants would have the incentive to use Amazon’s payment system to access a greater number of customers. However, after setting aside their differences, it’s likely that by allowing its merchants to use the benefits of the Prime ecosystem once again, Shopify itself is going to benefit due to the potential increase in gross merchandise volume that could outweigh the competition risks.

Considering that the U.S. economy is expected to expand by 4.9% in Q3, it certainly looks like the partnership with Amazon could become another great growth catalyst for Shopify’s business in the end. Add to all of this the fact that the eCommerce market in the United States shows no signs of slowing down and is forecasted to grow at an aggressive double-digit rate and worth around $1.4 trillion by 2027, and it becomes obvious that Shopify has more than enough opportunities to generate meaningful returns. Even the street believes that Shopify growth story is far from over and expects the company to continue to increase its sales at a double-digit rate after making countless upward revisions in recent months.

However, despite all of this optimism, there are several things that could undermine the bullish thesis in the short-term and make Shopify’s stock an unattractive investment at the current price at this stage.

Is The Bull Run About To End?

While Shopify has plenty of growth catalysts, there’s a risk that the economy could underperform in the upcoming months, which could negatively affect the company’s growth prospects in the upcoming quarter. Considering that we’ve seen a surge in oil prices in recent months due to the Saudi-led oil production cuts, there’s a risk that inflation will once again rise and undermine consumer confidence. We already saw how the CPI has increased M/M in August after months of decline, and the potential rise of energy prices ahead of the winter season could certainly decrease the purchasing power of consumers.

In addition to the macro risks, there are also reasons to believe that Shopify’s stock is currently in overbought territory, and it would become much harder for it to appreciate further in the current environment, especially as the AI-led rally slowly loses momentum. Let’s not forget that the company trades at around 100 times its earnings and over 9 times its forward sales. While such an excessive valuation could’ve been ignored if the Federal Reserve had practiced a loose monetary policy, it’s hard to believe that the stock will trade at significantly higher multiples anytime soon if rates remain at the current levels for longer than expected. Even Amazon trades at lower multiples with a forward P/E of ~60x.

If the worsened economic conditions force the company to revise its growth expectations, then Shopify’s stock would likely lose a decent chance to significantly appreciate anytime soon. The company’s shares have already failed to break and remain above the $70 per share resistance level for a while. We’re also currently experiencing a change in sentiment, which made Shopify stock lose nearly all of its gains for September so far. If the overall market depreciates on weakness in the short to near term, then we could be almost certain that the same faith would await Shopify’s shares given the excessive multiples at which they currently trade.

The Bottom Line

Overall, it’s safe to say that Shopify Inc. is a great company with a solid business model that is able to ensure aggressive growth over the long run. However, it would be also safe to assume that it would be significantly harder for Shopify’s shares to greatly appreciate in the coming months given the macro and valuation headwinds that the company faces. As such, I tend to believe that the bull run which I predicted earlier this year has likely come to an end, and it’s better to wait for a further pullback before accumulating a position in the company again.

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