Shopify (NYSE:SHOP) stock is so far overvalued compared to its peers and realistic expectations it is hard to know where to begin. SHOP stock has a $36.2 billion market value and is up over 135% year-to-date. Shopify’s revenues are expected to be about $1.52 billion this year and is trading for 24 times revenues.
A fast-growing company would have this valuation. But it would be a price-to-earnings ratio, not this price-to-sales ratio.
SHOP Stock Revenue Valuation Comparisons
Shopify’s two main competitors in the third-party e-commerce drop-shipping business, WooCommerce and Magento, are privately held so it is hard to compare their valuations. Other competitors, according to Top10.com, like Bigcommerce, Squarespace, 3DCart, and Volusion are also private and hard to compare with Shopify.
But a similar third-party e-commerce company, Etsy (NASDAQ:ETSY), forecasts $787 million to $797 million in revenue this year. The ETSY stock market value is $6.5 billion. That gives ETSY stock a multiple of 9 times forecasted revenue.
SHOP stock should be trading one-third lower based on the ETSY metric. The Shopify stock price should be $108.63 and its valuation $12.46 billion, instead of $315.50 and $36 billion, respectively.
Wix (NASDAQ:WIX) has a $5.78 billion valuation and is forecasting $765 million to $831 million in revenue this year. Its valuation is 8.85 times the mid-point expected revenue. Using this metric, the Shopify stock market value would be $11 billion. The SHOP stock price would be $95.87 per share.
SHOP Taking on Amazon
Investors have become enthralled with Shopify ever since its decision to offer fulfillment services for its business customers. The new Shopify Fulfillment Network, announced in June, will compete with Amazon (NASDAQ:AMZN). They will act as a third-party warehouse and shipper/packer for small businesses.
SHOP stock skyrocketed as a result of this news. The thinking is that Shopify will rival Amazon and make similar profits. Recently SHOP raised $600 million to buy a warehouse fulfillment and robot company, 6 River Systems. It paid $450 million for the company.
Investors have no idea if Shopify can actually make a profit in this business. Amazon is a fierce competitor. It could easily afford to lower its fees to businesses, which would make life very difficult for Shopify.
Another issue is, why would Shopify’s drop-shipping customers have their inventory stored at Shopify? For example, many drop-shippers already list their products both on Shopify and Amazon. They either directly ship the product themselves or have the supplier ship the product to the customer.
Others are skeptical why Shopify didn’t buy an existing fulfillment company or work with FedEx (NYSE:FDX), which just got dropped by Amazon.
I think it is a good thing that Amazon will now face competition. I had a third-party “FBA” business (Fulfillment by Amazon). It became unprofitable due to Amazon’s ever-increasing fees, so I decided to cut it back. I came to the conclusion that there was only one way the business would become profitable: Use U.S factories and ship private-label products directly to Amazon FBA. I think it is good that Shopify’s entry could lead to lower fulfillment fees.
What to Do With Shopify Stock?
It seems very clear that the Shopify stock price has a huge premium. Other third-party e-commerce hosting companies are cheaper. The premium relates to Shopify’s entry into fulfillment business to rival Amazon.
The SHOP stock price assumes perfection. It discounts multiples of Shopify’s existing revenue for the future. Investors should wait to see if this comes to pass. Also, they should choose a cheaper price to buy Shopify stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. It launched on August 30. We are offering a discount in September. As a result, subscribers will receive a 20% discount, plus a two-week free trial.
