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Is Shopify a Smart Buy for 2021?

Shopify (SHOP) has been on quite the roll, up almost 1,000% over the past three years. The stock was even recently upgraded? But is it still worth buying now? Read more to find out.

Shopify Inc. (SHOP) is already up 6.1% for the year, after gaining 184.7% in 2020. In fact, the stock is up a whopping 940% over the past three years. The company was already seeing success before the pandemic, but COVID drove e-commerce growth into hyperdrive. SHOP has benefited as much as almost any company from the pandemic-induced increase in e-commerce. The lockdowns resulted in physical retailers shutting down their stores and forcing people to shop online. 

The Company

The company offers an e-commerce platform to small and midsize businesses. It operates through two segments: subscription solutions and merchant solutions. Its solutions let small enterprises get online quickly and inexpensively. Merchants pay a monthly fee to access the platform that provides all the tools necessary to build and manage their e-commerce store. The company's solutions were perfect for small businesses that had to close their physical storefront during the lockdown and get online quickly.

Its merchant solutions are add-on products that facilitate e-commerce, including Shopify Payments that enable merchants to accept payments and Shopify Shipping and Shopify Capital. The company has a stable revenue model based on its subscription-as-a-service (SaaS) business, but it is also generating revenue from customer sales. So, the more sales a merchant customer makes, the more revenue SHOP makes. The company recently introduced Shop Pay installments, a "buy now, pay later" solution. This solution allows merchants to offer financing to their customers.

Many entrepreneurs saw an opportunity during the pandemic to open their online stores, while many larger retail companies didn't have the infrastructure in place to handle e-commerce orders. Even after the vaccine news in November, the stock has continued its ascent. That's because many Americans are still unemployed, and many are signing up as merchants on SHOP to start their own online businesses.

Analyst Upgrade

The stock was recently upgraded to "Outperform" by Oppenheimer analyst Koji Ikeda. Ikeda also raised his target price for SHOP to $1,300. He believes the shift to digital commerce is still accelerating and that the company's global commerce total addressable market will reach $255B by 2025. This is 330% higher than the 2020 estimate of $59B. That target price represents an 8% upside from its current price of $1,200.98.

While 8% still represents a potential upside for the stock, the question is how much further can the stock go up, especially since other analysts have a lower target price. According to the StockNews Price Target feature, the average target price for SHOP is $1134.26, which is lower than its current price.

Thesis for Buying

SHOP had a strong third quarter, as sales jumped 96% year over year to $767 million. This was driven by a 48% year over year increase in revenue from the subscription solutions segment as more merchants joined it's platform to accommodate the consumer shift to e-commerce. The company reports its fourth-quarter results on February 10th, and revenue is expected to increase 80% year over year, while earnings are expected to rise 195.30% year over year.

That's not all. Earnings are expected to rise 200% next quarter, on a year over year basis. However, EPS is expected to fall 1.9% for the year. The company also has a healthy balance sheet with $6.1 billion in cash as of the end of the quarter. This is up from $2.7 billion in the third quarter last year. Long-term debt is only $892 million, and the firm's current ratio is comfortably high at 17.9.

The stock is rated a "Buy" in our POWR Ratings system. It holds a grade of "A" for Trade Grade and a "B" for Buy & Hold and Peer Grade. It is also the #12 ranked stock in the Internet – Services industry. 

I agree with the POWR Ratings and view the stock as a "Buy." I believe the stock has more room to grow, but I don't see it climbing as rapidly as last year. While earnings are expected to increase for the fourth quarter of 2020 and the first quarter of this year, I would keep the stock on a short leash as the rest of the year might not be as promising.

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SHOP shares . Year-to-date, SHOP has gained 6.10%, versus a 2.68% rise in the benchmark S&P 500 index during the same period.



About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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