Shopify’s Down 80%: Should You Buy the Dip on this E-Commerce Stock?

e-commerce company Shopify (STORE -6.26%) was a big winner during COVID-19, but the stock has fallen out of favor, down as much as 80% from its peak. Wall Street may be irrational in the short term, but it’s fair to ask questions in the face of such a significant drop.

Investors may discover more questions than answers as they dig deeper into Shopify. Here’s what’s happening and why investors shouldn’t assume Shopify is cheap just because the stock has fallen so far.

Valuation has to do with perspective

Shopify is still a winning investment; the stock has risen more than 1,200% since the company’s IPO in 2015. However, the stock was once up 6,000% and has declined massively over the last 18 months. The stock looks like a bargain on the surface; if it follows the price-to-sales (P/S) ratio of 8, it’s arguably its cheapest valuation. But it is not always so simple; For example, let’s compare Shopify’s valuation to the undisputed king of US eCommerce, Amazon:

SHOP PS Ratio data by YGraphics.

Even at its lowest valuation on record, Shopify is about three times more expensive than Amazon stock. So investors are now faced with the question of whether Shopify is worth such a premium to Amazon. Otherwise, there’s a good chance that Mr. Market will either sell more Shopify or increase Amazon’s valuation, or both. The fundamentals of a company tend to dictate where prices move in the long term.

Should Shopify have a premium over Amazon?

Let’s compare some critical fundamentals between the two companies; Shopify is a much smaller company than Amazon and is growing faster. You can see that Shopify’s revenue growth was consistently above 30% a few years ago, and it skyrocketed even higher during the pandemic. Meanwhile, Amazon has been a bit slower and more stable. One could easily argue for Shopify’s premium valuation based on revenue growth alone.

SHOP revenue chart (quarterly year-over-year growth).

SHOP Revenue (Quarterly YoY Growth) data by YGraphics

But a closer look reveals some problems. For one thing, Shopify’s growth has slowed noticeably over time. Its most recent quarter, when it posted 15% growth, is a far cry from several years ago. Yes, Amazon’s growth has also slowed between 2021 and 2022, but the gap in growth rates between the two companies is arguably smaller than ever.

Then you get into the finances of each company. Amazon is a more profitable company than Shopify right now. Both companies have seen their free cash flow dry up over the past year due to rising freight costs, salaries and other operating expenses. However, Amazon is turning 7% of its sales into operating profit versus Shopify’s 2%. Meanwhile, Amazon remains profitable on the bottom line with $11.6 billion in net income over the past year, while Shopify remains in the red.

BUY Free Cash Flow Diagram.

BUY Free Cash Flow data by YGraphics.

Perhaps most important in the long run will be Shopify’s continued investments to develop its logistics segment to better compete with Amazon. Meanwhile, Amazon’s revenue stream, Amazon Web Services (AWS), continues to grow and should add more cash to the company’s coffers over time.

Amazon might be the best stock to buy today

This isn’t to say that Shopify is in the wrong place, but the argument that stocks deserve a much higher multiple than Amazon’s is shaky, in my opinion. Shopify doesn’t have an AWS-like business that generates tons of cash flow, and its larger investments could crimp Shopify’s finances for a while, even if these investments are necessary for its long-term competitive position.

Sometimes a stock goes into the battery too hard, and that’s where I see Shopify right now. By itself, Shopify still offers a lot for long-term investors, but Amazon could be the stock that will give investors the biggest short-term advantage due to AWS and how cheap stocks are today.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. justin pope has no position in any of the mentioned stocks. The Motley Fool has positions and recommends Amazon and Shopify. The Motley Fool recommends the following options: $1,140 January 2023 Long Calls on Shopify and $1,160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.

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