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Should Shopify Shareholders Be Worried About Its Lofty Valuation?

Shopify (NYSE: SHOP) stock has been a tremendous winner for shareholders, becoming a multibagger for those who have held since early 2020. But looking at the stock today, its valuation would scare off value investors -- and maybe even some growth investors, too. On a Fool Live episode recorded on June 30, Fool contributors Brian Feroldi and Brian Withers discuss the company's recent results and whether investors should be prepared for a pullback in the share price.

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Brian Feroldi: Let's shift on to Shopify, I'm on Shopify duty. I am going to report Shopify's most recent earnings because we haven't covered it on this segment yet. Shopify's most recent quarter, the gross merchandising volume, which is the total value of everything that's run through the platform, that more than doubled year-over-year to $37.3 billion. Gross payment volume, aka the payment volume that's going through its network, that was up 137 percent to $17.3 billion. Merchant solutions revenue was up 137 percent to $688 million, and subscription revenue was a laggard at only 71 percent revenue growth to $321 million. You add all that up and total revenue grew 110 percent to just under $1 billion. The headline numbers were great.

What I found fascinating was that Shopify's gross margin actually expanded during the period. That's impressive given the investments that this company is making to the Shopify fulfillment network. Gross profit dollars grew 117 percent to $565 million. That enormous uptick in sales volume allowed the company to swing from an operating loss last year of $7 million to an operating profit of $211 million this year. That's incredible. Adjusted net income was even higher at $254 million or $2 per share. That was a tenfold increase over the prior year.

What was even more amazing is these figures don't include $1.3 billion gain that it had on its equity investment in a firm that was related to the company's IPO. Some more numbers that just blew me away: The number of users of its Shopify app is now up to 24 million. Its partnership ecosystem expanded 73 percent, and they recently rolled out our new point-of-sale systems in Europe. Long term, the thesis for Shopify is intact.

Brian Withers: Brian, just quarter after quarter, we hear Shopify just knocking it out of the park, especially with the coronavirus, everything has been on turbo boost. But I can't help but look at Shopify's price-to-sales ratio. It's still in the 50s. Management has projected this torrid grow this going to slow down. They haven't said to what, but they said it's definitely going to slow down. Should investors be prepared for a hefty pullback in the stock?

Brian Feroldi: Investors should always be prepared for a hefty [laughs] pullback in this stock. If you look at Shopify's history, the long-term trajectory is up, but it's been a bumpy ride. Given the nosebleed valuation that we've seen, you should definitely be expecting that. However, I think the situation is a lot like Netflix.

If you looked at Netflix results, what happened in 2020, [an] enormous uptick in subscription volume, and that has really tapered off this year. If that happened and we looked at the two-year numbers for Shopify, we're all going to have smiles on our faces, but yes, prepare yourself for volatility ahead.

Brian Feroldi owns shares of Shopify. Brian Withers owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.


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