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SHOP stock is still overvalued despite its recent drop

In August 2021, I wrote that Shopify (NYSE:STORE) was overstated by any reasonable measure. At the time, SHOP stock was trading at $1,525 per share, but later hit a high of around $1,690 on November 19. Now the stock is changing hands around the $655 mark. However, I think it’s still likely overvalued, even though it’s falling.

Source: Paul McKinnon/

My reason why? This has to do with the e-commerce company’s recent earnings release on Feb. 16. For the period, the Canada-based company reported strong revenue, gross merchandise value (GMV) and subscription growth year-over-year (YoY) basis. But there are other things to consider.

Here’s what you need to know about the evolution of SHOP stock.

SHOP Stock: drop in revenue forecasts

Really, the issue with SHOP’s stock has to do with the company’s recent guidelines. Shopify said there are “secular tailwinds” for entrepreneurs going forward, but inflation and near-term consumer spending will cause problems for its growth rates. The company expects “full-year 2022 revenue growth to be lower than the 57% revenue growth achieved in 2021.”

However, the biggest effect on Shopify’s revenue will come from the huge changes to its “rev share” program, where it participates in revenue for entrepreneurs. This is how a site, barometricdescribes the changes:

“As of August 1, 2021, Shopify has eliminated its revenue share on the first $1,000,000 of revenue generated by Shopify Partners. But that’s not all – after a business hits its first million, Shopify has also changed its revenue share on incremental revenue generated per calendar year […] going from 20% to 15%!”

There is more. Shopify also moved from “recognizing gross revenue to recognizing net revenue for the sale of themes following revised contract terms.” Shopify themes are the set of HTML, CSS, JavaScript, Liquid, and image files that control the appearance (or “front-end”) of an online Shopify store.

By switching to net sales, the company’s sales will be lower. But as The Motley Fool points out, it only changes “the appearance lower superior results. It really doesn’t change anything because ultimately the chargebacks are wiped out in the end.

Where does that leave Shopify

That said, analysts still seem to have reasonably high expectations for SHOP stocks this year and next. The only change is that the market is pricing its growth expectations much lower.

For example, 41 analysts interviewed by Looking for Alpha show that their average revenue forecast for 2022 is $6.08 billion, compared to $4.61 billion for the year ending December 2021. That still represents 32% growth this year. Admittedly, this is lower than the 57% growth last year, but it is still a very high growth rate.

Additionally, these same analysts also forecast 2023 revenue to reach $8.08 billion. That’s 75% more than 2021 revenue of $4.61 billion. This implies a two-year compound annual growth rate (CAGR) of 32.4%, or about one-third each for the next two years.

SHOP revaluation

Yet the problem is that, despite these huge growth rates, the market is no longer willing to give it a very high valuation. The truth is that at its current market cap of $82 billion, SHOP stock is still trading at a high of 13.61 times forecast 2022 earnings.

This is normally the kind of multiple reserved for revenue in most other businesses, including retailers.

Here is a very simple example. Amazon (NASDAQ:AMZN) is trading around 3 times forecast revenue for 2022, according to Looking for Alpha. Now, Amazon’s revenue is expected to rise just 15% from its 2021 level, analysts say.

If we double the multiple since Shopify’s 33% growth rate is 2.2 times that of Amazon, the price-to-sales (P/S) ratio should not exceed 6.6. Let’s call it 7 times earnings. That’s still 49% less than Shopify’s 13.61 times P/S multiple.

In other words, SHOP shares should not trade more than 7 times earnings. Even though we’re liberals, we could call it 10 times earnings for simplicity’s sake. This implies that SHOP stock could fall almost 27% more (i.e. 10/13.61 – 1 = -26.5%). This puts its target price below $480 per share.

What to do with Shopify

I have shown that, even being liberal, we can estimate that SHOP’s stock is likely to continue to decline as the market reassesses its rate of growth in the future.

Most analysts will probably start lowering their target prices after a more realistic comparison with Amazon. Therefore, value investors will want to wait for the stock to come down to earth before venturing into an investment.

As of the date of publication, Mark R. Hake did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to Publication guidelines.

Mark Hake writes about personal finance on and and execute the Guide to Total Return Value that you can see again here.


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