Shopify Inventory: Buy, Keep or Sell?

The past 12 months have been volatile for Shopifyhis (STORE 1.09%) investors. At one point, the stock traded as low as $45.50, but then doubled over the next few months to $91.57. Today, the stock is down to around $63.

Recent stock movement suggests that bulls and bears are still undecided about Shopify’s long-term prospects. The former likes the huge e-commerce opportunity ahead, while the latter has concerns about Shopify’s high valuation.

So what should current and future investors do with Shopify stock? This article aims to shed some light on this.

Image source: Getty Images.

An alternative partner for merchants

One of the biggest trends of the past two decades is the growth of the e-commerce industry, propelling some of the biggest success stories of our generation. Amazon and Shopify are some examples of huge beneficiaries of this tailwind.

While both companies look the same to general consumers, they are completely different companies with very different business models. Amazon operates an e-commerce marketplace, selling products directly and indirectly (through third-party merchants) to consumers. This combination of first-party and third-party selling models helps Amazon get the best of both worlds, serving its customers and earning commissions from merchants in exchange for sales on its platform.

The relationship between Amazon and its merchants is love-hate. On the one hand, merchants depend on Amazon’s massive user base and other services, such as fulfillment and logistics, to increase their sales. However, they are also at the mercy of the tech giant as Amazon sets the rules of the game, which could be against the interest of its merchants. Worse, Amazon is a direct competitor to these merchants, offering similar products at lower prices — it can do so because of its huge buying power and access to historical sales information.

Shopify, on the other hand, is a software-as-a-service (SaaS) company that primarily focuses on providing tools to help merchants succeed in the digital world. This means that, unlike Amazon, Shopify allows merchants full ownership of customer data, brands, websites and more, giving them control over their business.

In addition, merchants can customize their online stores, websites and services for their business needs, which helps them better serve their customers. This, again, contrasts sharply with Amazon, as retailers have no choice but to accept Amazon’s decision on store design and other services.

Another key aspect that Shopify brings is helping merchants become omnichannel, providing all the tools to sell online, offline, and everywhere else. For example, a merchant can start selling online using the Shopify software platform, but later expand into the real world with Shopify POS, equipped with both hardware and software tools.

In short, Shopify has made itself indispensable by aligning its interests with those of its merchants.

Going global and everywhere else

Shopify has been an outstanding growth stock. From 2015 to 2023, revenue grew from $205 million to $7.1 billion. Given its size, some investors are concerned about the tech company’s ability to grow from here.

I think these concerns, while valid, may have missed the bigger picture. For starters, Shopify has enabled $236 billion in gross merchandise value (GMV) in 2023, just 3% of total spending in the $7.3 trillion US retail market. It could grow exponentially and still not exhaust the opportunity.

To that end, the company is investing heavily in growing its offline business through its POS hardware and software offerings, with promising early results. For example, offline revenue reached $411 million in 2023, five times higher than in 2019. As long as it can continue to innovate and add tools to help customers succeed in selling offline, it will have plenty of opportunities to grow alongside existing merchants (those expanding from online to omnichannel) and to attract new merchants traditionally from the offline world.

But that’s not all. Shopify aims to become a global e-commerce player by further expanding its addressable target market. This includes bringing the best tools offered to merchants in existing markets, such as payments, POS and financing, to newer markets to help overseas merchants succeed. Additionally, it allows existing customers to go global through Shopify Marketplaces — a set of tools to help merchants sell internationally. To put that in perspective, global e-commerce sales will reach $5.8 trillion in 2023, not including offline retail.

In short, Shopify has enough opportunities to keep him busy for the next decade.

A solid deal, but at a premium price

Identifying a solid company with good prospects is only half the equation for a solid investment. Investors should also consider the price they are paying for the stock. From this perspective, Shopify trades at a price-to-sales (PS) ratio of 11.2, a considerable premium to Amazon’s P/S ratio of 3.

While it’s not unreasonable for investors to pay a higher price for Shopify, paying such a high multiple doesn’t seem safe given its vast prospects.

What it all means for investors

Shopify has had a remarkable growth track record since going public. Better yet, the company is well positioned to continue growing in the coming years as it exploits opportunities locally and in overseas markets.

However, the upside factors have been reflected in its premium valuation, so investors aren’t getting a bargain when they buy the stock today. Overall, while the stock probably isn’t a good buy today given the opportunity it has, it’s not a sell for those who already own it. It’s a holdover for now.