Buy Shopify Stock Down 50% for Huge Growth Upside?

Shopify (SHOP Free Report) was a Wall Street star long before the pandemic, as businesses of all stripes turned to SHOP for all things e-commerce. The stock has tumbled since hitting fresh highs in November and investors might want to consider buying Shopify ahead of its fourth quarter financial release on February 16.

SHOP Essentials

Shopify provides what it calls “essential internet infrastructure for commerce,” including everything from site design and marketing to payments and shipping. Shopify makes money from recurring subscription fees and tons of various add-ons that help run many other core business functions.

SHOP’s point-of-sale products and software have also gained momentum, while helping create a unified approach between in-person and digital. Shopify boasts that it powers over 1.7 million businesses in more than 175 countries. The company offers different tiers, with some aimed at entrepreneurs, as well as small and medium businesses and high-volume merchants.

Shopify, Amazon (AMZN Free Report) , and countless other digital commerce companies have tons of growth runway remaining since e-commerce accounted for only 13.1% of total U.S. retail sales in Q3 FY21 (most recent data)—up from roughly 10% in 2019.

Image Source: Zacks Investment Research

Recent Price Movement and Outlook

SHOP stock skyrocketed from $70 a share in 2017 to $1,700 in November. This run includes a 400% climb in the last three years, which takes into account Shopify’s recent drop.

Shopify shares have plummeted by 50% from its records and are currently trading at roughly $885 a share. The stock popped over 9% through late-afternoon trading Friday. The jump followed Amazon, Snap and other impressive showings after the bell Thursday.

Shopify’s larger downturn over the past several months came as it became a victim of its own success. Shopify also got caught up in the market-wide dumping of all things growth. Plus, SHOP fell short of our Q3 EPS estimates and Wall Street started to become a tad concerned about its subdued growth outlook.

Zacks estimates call for Shopify’s FY21 revenue to surge 56% to $4.6 billion, with FY22 set to come in 33% higher. This would compare to 86% top-line expansion in FY20 and a 67% average between FY19 and FY16. Percentagewise, 2022 marks slowing growth. Still, the company is expected to add $1.5 billion to its top-line, or roughly its total 2019 revenue.

Shopify’s adjusted earnings are projected to climb by 61% in FY21 to see it hit $6.39 a share, with FY22 expected to come in 8% higher. Not including Q3’s big bottom-line miss, SHOP had consistently crushed our quarterly earnings estimates for years.

Bottom Line

Shopify currently lands a Zacks Rank #3 (Hold) and its recalibrated valuation might still be a bit too high for some. SHOP’s forward PEG ratio (P/E ratio divided by its growth rate) is 5.9 at the moment, which is down from a whopping 66 last April and its 34 median over the past 12 months. This compares to Amazon’s 2.2, Etsy’s 1.6, and its Internet Services Market’s 1.1.

Shopify’s valuation is rich, but it’s still firmly focused on expansion and it has a really strong balance sheet that supports an array of possibilities. This includes $7.5 billion in cash, equivalents, and marketable securities ($13.5 billion in total assets) against $2.2 billion in total liabilities.

Wall Street is less bullish on Shopify these days. Still, 15 of the 29 brokerage recommendations Zacks has are “Strong Buys,” with only one “Sell.” And SHOP trades around 80% below its current Zacks consensus price target of $1,600 a share.

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Benjamin Rains