Shopify: Buy, Sell, or Hold?

Shopify 's (NYSE: SHOP) shares hit a record high of $169.06 on Nov. 19, 2021. The e-commerce platform impressed the bulls with its accelerating growth, which was driven primarily by businesses selling more products online during the pandemic. The buying frenzy in growth and meme stocks amplified those gains.

Trading at about $60 today, Shopify's stock has dropped a long way from those highs. The business has lost its luster over the past three years as it lapped its pandemic-driven acceleration and faced tougher inflationary headwinds. Rising interest rates also popped its bubbly valuations -- a painful drawdown for investors who bought the stock near the top. But is Shopify worth buying again now?

Image source: Getty Images.

The reasons to buy Shopify

The bulls still love Shopify because its business model is disruptive. By providing self-service tools that enable anyone to open an online store, process payments, fulfill orders, and launch online marketing campaigns, Shopify makes it easy for merchants to break free from large online marketplaces like Amazon (NASDAQ: AMZN) .

There's still plenty of demand for its services. From 2013 to 2023, its revenue grew at a compound annual growth rate (CAGR) of 64% -- from $50 million to $7.06 billion. The growth in gross merchandise volume (GMV), gross payment volume (GPV), and revenue cooled off in 2022 after the pandemic-related tailwinds dissipated, but all three metrics stabilized in 2023.

Data source: Shopify.

From 2023 to 2026, analysts expect Shopify's revenue to expand at a CAGR of 21%. That growth could be driven by the company's new Magic and Sidekick generative AI tools along with the expansion of its Shop Pay payments platform, its Shop Cash rewards program, and its point-of-sale hardware business for brick-and-mortar merchants. It's also locking in its merchants with more tools serving credit, expense management, and cross border e-commerce.

Shopify also integrated Amazon's "Buy with Prime" buttons into its stores last year. The partnership, which allows Prime members to make one-click purchases on Shopify and access free delivery options via Amazon's fulfillment network, should allay concerns that the e-commerce giant is trying to snuff out Shopify with those buttons for independent merchants.

In June 2023, Shopify divested its capital-intensive logistics division (which it previously expanded through its acquisitions of 6 River Systems in 2019 and Deliverr in 2022). The sale halted its plans of building a first-party logistics network, but it should reduce its costs by driving its merchants to fulfill their orders through its third-party logistics partners.

Analysts expect that shift, as well as thousands of layoffs, to boost its net margin from 3% in 2023 to 17% in 2026. Its net profit is expected to grow at a CAGR of 137% on a generally accepted accounting principles ( GAAP ) basis between 2023 and 2026.

The reasons to sell Shopify

Shopify is still well-positioned to grow over the next few years as the e-commerce market expands and more merchants shift away from Amazon's third-party marketplace. It will also benefit from the secular growth of "social shopping" -- since a lot of its smaller merchants peddle their products on ByteDance's TikTok, Meta 's Instagram, Pinterest , and other social media platforms.

However, the stock's valuations already reflect a lot of those growth expectations. At roughly $60, Shopify trades at 176 times this year's GAAP EPS estimate. With an enterprise value of $96 billion, it's still valued at 11 times this year's sales. By comparison, Amazon trades at 39 times forward earnings and 3 times this year's sales.

In other words, an unexpected earnings miss, fresh macro headwinds, and tougher competition from smaller competitors like Adobe Commerce and BigCommerce could still compress its valuations and crush the share price. That might be why Shopify's insiders haven't bought a single share over the past 12 months.

So is it the right time to buy, sell, or hold Shopify?

Shopify still has a bright future, but its frothy valuations could cap its near-term gains. I think current shareholders should simply hold Shopify, but shouldn't aggressively buy more shares until its valuations cool down. That said, there aren't any compelling reasons to sell the stock either -- thanks to expectations for a warmer macro environment and lower interest rates, which should limit its downside potential throughout the rest of the year.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Adobe, Amazon, Meta Platforms, Pinterest, and Shopify. The Motley Fool has a disclosure policy .