Shopify (SHOP 0.13%) shares rallied from March 2020 through most of 2021 as companies counted on e-commerce software to grow and manage their businesses. COVID-19 expedited the shift toward a digital retail environment, serving as a substantial boost to Shopify's sales. As pandemic threats alleviate, some investors argue that demand for Shopify's services will face significant downward pressure for the foreseeable future.
As long-term investors, it's important to ignore near-term noise and focus on the fundamental outlook of a business. In fact, short-term headwinds that lead to share prices falling often present the best buying opportunities for prudent investors. With that in mind, let's examine Shopify's long-term investment profile and whether or not investors should consider buying the stock today.
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Why is Shopify falling?
Shopify stock is down 49% year to date owing to a variety of factors, both company-specific and macroeconomic-related. Broader economic and geopolitical tailwinds like rising interest rates and the Russia-Ukraine crisis continue exerting pressure on the company's shares. It's not just Shopify, though -- tech stocks as a whole are beaten down as investors race to value names and more conservative investments. It's not unusual for investors to exit tech stocks, which are generally more expensive and require a greater risk tolerance, during times of economic and political uncertainty.
Shopify's recent pullback can also be attributed to fear that the company's growth will slow down moving forward. In its most recent earnings announcement, Tobias Lütke, Shopify's CEO, stated that top-line growth is expected to be lower in 2022 than it was last year. This sparked concern for some investors who were buying into Shopify's growth story, adding more fuel to the sell-off fire. But when you read more between the lines, it's hard to justify such a massive drop in Shopify's value. This is especially true when considering the company's market position and long-term business outlook.
The growth story will prevail
Shopify has established an impressive e-commerce moat in recent years. As of January 2022, the company has captured 32% of the e-commerce platform market in the United States. Next in line are competitors WooCommerce Checkout and Wix Stores (WIX -0.29%), which control 22% and 14% of the U.S. market, respectively. As an industry leader with a total addressable market of $153 billion, Shopify is well-positioned to lead the way going forward.
Although growth is projected to unwind in 2022, Shopify is still forecasted to generate an impressive top-line. Consensus estimates indicate that Shopify's sales will reach $6.1 billion this year, translating to 31% growth year over year. By 2025, the company's top-line is expected to hit $13.9 billion, representing an average annualized growth of 25% from 2021 revenue. Earnings are expected to expand as well -- analysts are forecasting an earnings per share of $12.43 in fiscal year 2025, up 94% from last year's figure.
I'm not surprised that analysts are forecasting substantial growth for Shopify moving forward. Shopify is uniquely positioned as a clear leader in the fast-growing e-commerce market. Secular growth trends tend to last much longer than we think, and while Shopify has had an impressive run thus far, the company's growth story is far from over.
Shopify's valuation has become more enticing
Shopify was trading at nearly 50 times sales in November 2021 as the company carried on its impressive rally. Today, the company's price-to-sales multiple sits at 19, over 2.5 times less than it was just a few months ago. The company hasn't traded at these levels since 2019, which I think should draw the attention of opportunistic investors.
SHOP PS Ratio data by YCharts
It's hard to justify Shopify trading at three-year lows despite the progress the company made over the same time period. The company is moving in an upward trajectory and will continue piloting the e-commerce software market well into the future. It's challenging to predict when Shopify may bottom-out, but the company's recent sell-off warrants attention from long-term investors today.
Is Shopify a wise investment today?
I think Shopify offers investors a solid buying opportunity today. Given its strong fundamentals combined with its weakening valuation, the company is more appealing than it has been for quite some time. The e-commerce market is set to grow at a red-hot pace for several years, and Shopify is in an advantageous position to maintain command of the industry.
It's not every day investors are able to acquire world-leading companies at bargain prices. During times of economic and political uncertainty, it's not always easy to think long-term. But patient investors who buy Shopify today could be greatly rewarded over the long run.
