Shopify stock price has had a strong performance this year as it jumped from the April low of $70 to the current $166. This growth happened as the company’s growth trajectory accelerated. So, is the highly overvalued company a good investment today?
Shopify revenue and profitability growth have continued
Shopify is a top company that powers the e-commerce business globally. Its platform makes it easier for people to build and manage their e-commerce stores.
It has a substantial market share in the sector, making it the default platform for building these sites. Its other competitors, like Wix and BigCommerce, have struggled to gain share over time.
READ MORE: BigCommerce vs Shopify stocks: Here’s why SHOP beats BIGC
The company’s growth has been strong, with its annual revenue moving from $205 milion in 2015 to over $10.6 billion in the trailing twelve months (TTM).
Similarly, its profitability metrics have done well, moving from a net loss of $18 million to a profit of $2 billion last year. This growth will accelerate as more customers join and as its profitability continue.
Wall Street analysts expect that the company’s revenue will move to $211.46 billion this year followed by $14.1 bilion next year. The earnings per share, on the other hand, is expected to move from $1.45 this year to $1.85 next year. Shopify has a long history of beating analysts’ estimates.
SHOP valuation concerns have continued
The biggest concern about Shopify is that the company has always been highly overvalued because of its growing market share. Data compiled by Seeking Alpha shows that it has a valuation grade of D.
This is based on the fact that its forward price-to-earnings ratio of 111.27 based on non-GAAP measures. This metric is much higher than the sector median of 24. It is also higher than other growth companies like Nvidia and AMD.
The company has a forward PE ratio of 202.65, much higher than the sector median of 30.8. This makes it one of the most overvalued companies in the United States.
The PE multiple compares a company’s stock price and its earnings per share (EPS). Its main challenge is that it does not factor in how fast the company is growing. As such, the PEG ratio is usually seen as a better way to look at a company. In this case, the company has a forward PEG ratio of 2.7, which is also higher than other companies
Another way to value Shopify is known as the rule-of-40, which looks at a company’s revenue growth and its profitability metrics. In this case, the company has a forward revenue growth of 26% and a net profit margin of 16%, giving it a rule-of-40 metric of 42%.
This rule-of-40 figure means that the company is not all that overvalued, as it is balancing its revenue growth and its profitability goals.
Wall Street analysts are generally bullish on the company, with a price target of $177, which is higher than the current $166, making it a hold.
Shopify stock price technical analysis
The daily timeframe chart shows that the SHOP stock price has moved sideways in the past few months. A closer look shows that it has formed a diamond pattern, a common bearish reversal sign.
It has also formed a head-and-shoulders pattern, while the MACD and the Relative Strength Index (RSI) point to a bearish reversal sign.
Therefore, the stock will likely retreat in the coming weeks, potentially to the psychological level at $150. A move above the key resistance level at $181 will invalidate the bearish outlook, potentially to the key point at $200.
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