The COVID-19 pandemic has disrupted the retail landscape. E-commerce is witnessing robust demand, revolutionizing the way businesses operate and how consumers choose to shop and pay. Consequently, e-commerce stocks have been among the strongest performers over the last year, dominating the stock market since the onset of the pandemic.

As Canada’s most valuable internet services company, Shopify, Inc. (SHOP) has ridden  the crest of the digital commerce boom. In fact, SHOP is now the second largest retail e-commerce sales platform by market share in the United States, just behind Amazon.com (AMZN).

SHOP provides an intuitive cloud-based, multi-channel commerce platform that allows merchants to host their stores online and connect with consumers. SHOP became vital for the survival of small- and medium-scale businesses that had little or no online presence prior to the pandemic. Not surprisingly, e-commerce’s  strong growth has driven  strong gains for SHOP, which has  innovated to meet continued broad-based demand. The stock has surged 168.3% over the past year versus  the S&P 500’s 16.3% returns.

Let’s take a closer look at the factors that could influence SHOP’s performance going forward:

Merchant Engagement

SHOP has over the past year significantly increased the number of merchants that host their businesses on its platform. Currently,  the company boasts more than one million merchants on its platform. In fact, SHOP’s partner ecosystem has continued to expand;  approximately 42,200 partners have referred a merchant to the platform over the past 12 months, up 72% versus the 24,500 referrals over the 12 months ended December 31, 2019.

SHOP has continued to innovate and launch new products to help its clients utilize  digital commerce services.  It has expanded its retail channels to include integrations with the sales channels of TikTok, Facebook (FB) shops, Walmart’s (WMT) online place and Pinterest (PINS) to enable merchants broaden their business avenues and drive new buyer traffic to their stores.

Expanding Payment Options on Platform

SHOP launched its all-new point of sale (POS) system, Shopify POS, in the early days  of the pandemic. The company gained from a solid uptick in contactless payment hardware by  retailers using the system because  it offered  the Shopify Tap & Chip Card Reader, Shopify Tap & Chip Case and Shopify Retail Kit. SHOP then launched  Shopify Payments in Austria and Belgium, where it enabled iDEAL as a local payment method and supported Bancontact debit payments, expanding the availability of Shopify Payments to 17 countries.

SHOP recently begun rolling out early access to Shop Pay Installments–a ‘buy now, pay later’ product that lets merchants offer their buyers more payment choice and flexibility at checkout, helping merchants boost sales through increased cart sizes and higher conversions.

Robust Financials

SHOP has grown its revenue at a CAGR of 61.7% over the past three  years. Its total revenue for the full year 2020 was $2.9 billion, increasing 86% year-over-year. The company generated a top line of $977.7 million in the fourth quarter, ended December 31, 2020, on the back of solid holiday season demand. Its gross merchandise volume (GMV) for the quarter nearly doubled year-over-year to hit  $119.6 billion for the full-year 2020. And its adjusted EPS for the year came in at $3.98, surging 1,227% compared to the year-ago value of $0.30.

Growth Could Decelerate Post Pandemic

Improving retail sales are hinting that e-commerce revenue growth will slow this year, as stimulus checks and vaccine rollouts encourage people to return to stores and rotate some of their spending back to brick-and-mortar stores. In fourth quarter earnings calls, SHOP  management said, “We expect that we will continue to grow revenue rapidly in 2021, albeit at a lower rate than in 2020.” The company also  stated that it does not expect its near doubling of GMV, as witnessed in 2020, to repeat this year.

Stretched Valuations

In terms of forward p/e, SHOP is currently trading at 400.92x, 1,327% higher than the industry average 28.10x. SHOP is trading well above the industry average in terms of trailing-12-month p/s also (29.09x versus 5.35x).

In terms of trailing-12-month price/cash flow, SHOP’s 778.98x is significantly higher than the industry average 22.80x.

POWR Ratings Indicate Uncertain Prospects 

SHOP has an overall rating of C, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among  these categories, SHOP has an A grade for Growth, indicating its ability to grow its financials at a faster pace compared to its peers.

SHOP also has an A grade for Sentiment, indicating analysts’ positive forecasts. On the other hand, SHOP has a Value Grade of F, consistent with its significantly higher-than-industry valuation.

SHOP is currently ranked #29 of 46 stocks in the C-rated Internet – Services industry.

Beyond what I stated above, we also have given SHOP grades for Momentum, Stability, Sentiment, and Quality. Get all the SHOP ratings here.

There are several other top-rated stocks in the same industry, click here to access them.

Bottom Line

The coronavirus pandemic caused  a structural shift in consumer behavior. Of course, some trends will eventually fade away, but e-commerce is one of the trends that is probably here to stay for the long-haul. Entrepreneurs worldwide  are now relying on internet services  to manage their businesses and grow their brands. However, one  must also acknowledge slowing post-pandemic e-commerce growth as the world reverts somewhat  to the “old normal” this year.

SHOP’s  prospects look good as it plans to boost investment on its infrastructure, Shop App product development, international expansion, and a Shopify Fulfillment Network. However, the stock has had an incredible run over the past year and has become largely overvalued. Hence, investors should wait for a better entry point.

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SHOP shares were trading at $1,402.00 per share on Thursday morning, down $23.00 (-1.61%). Year-to-date, SHOP has gained 23.86%, versus a 4.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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