Concerns about the economy have caused many e-commerce stocks to get into trouble this year. Shares of Shopify (BUSINESS -0.40%), WayfairAnd Etsy have all fallen by more than 10% in the last six months. Even the mighty Amazon has just managed to stay in the green during this period.
Investors fear the worst given a possible economic slowdown next year, but Shopify management believes the company is in a better position than many of its competitors.
Shopify has grown faster than its competitors
On August 7, the company released its results for the second quarter, which ended June 30. Revenue totaled $2 billion, up 21% year-over-year. Excluding the impact of the sale of the logistics business, the growth rate was even higher at 25%. For the current quarter, the company continues to expect revenue growth in the low to mid-20 percent range.
Compared to its competitors, Shopify has traditionally been a frontrunner in e-commerce.
Revenue growth for e-commerce stocks; data by YCharts. YoY = year over year.
What is the secret of Shopify?
In the recent conference call, Shopify President Harley Finkelstein highlighted two main reasons for the company’s great success. “I think a big part of the reason we’re not seeing the same things as others is because we just have merchants in a lot of verticals and in a lot of (geographies),” Finkelstein said.
What it ultimately comes down to is versatility. Merchants can sell on Amazon, Etsy and Wayfair, but with Shopify they have much more control over this process. It can help them quickly and easily open a store and integrate it with their existing website. Or they may not have a website at all and just want to create an online store through Shopify.
This makes the process much more adaptable to different business models and provides the flexibility to meet the needs of merchants, regardless of industry, product or service – or even the part of the world they are in. Shopify can help anyone sell online.
As Finkelstein indicated, the company has a presence in more than 175 countries. Amazon, on the other hand, also has a large global reach and can ship products to more than 100 countries, but it only has 21 marketplaces. Because Shopify can reach a larger and more diverse group of merchants and customers, it is less vulnerable to specific market or industry conditions and can therefore achieve better revenue growth than its competitors.
Is Shopify stock a good buy?
Despite the company’s encouraging numbers, the stock is down 12% year-to-date. The company is showing good growth, but earnings are still quite low, so the stock is trading at 70 times its recent earnings. However, based on a price-to-earnings-to-growth ratio of 1.1, there could be a good deal for investors willing to buy and hold for the long term.
But in the short term, depending on how the economy plays out, it could be a bumpy ride for the stock. The company’s business isn’t completely resilient to the economy — Shopify’s growth stalled in 2022 as interest rates rose and consumers faced challenges due to inflation.
It’s doing well right now, but investors shouldn’t assume the stock is in any way recession-proof. It can and probably will feel the effects of a downturn, but its diversification may help prevent its growth from collapsing as much as other e-commerce stocks.
Shopify can be a good buy over the long term, but investors should temper their expectations; it might not be easy if the economy worsens next year. And its high valuation could make it vulnerable to a sell-off.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski does not own any of the stocks mentioned. The Motley Fool owns and recommends Amazon, Etsy, and Shopify. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.
