Shopify shares slide 18%. With e-commerce on the rise, is this US stock a buy?

As the Shopify share price slides, investors are getting nervous. This US tech stock has investment risks attached to its significant growth potential. Would I buy?

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US e-commerce tech stock Shopify (NYSE:SHOP) has seen its share price rocket in recent years. The company allows anyone to set up and run an e-commerce store from its platform and they can build appealing and modern websites in a quick and intuitive way. The Canadian company started out in 2006 and has gone from strength to strength, far surpassing its original competitors, such as Magento and WordPress. In Q4 2020, its revenue grew a staggering 94% to $977m. It powers over one million businesses worldwide and is seeking to further expand globally.

Multiple revenue streams

The company now has a market value of around $150bn. In 2020, Shopify enjoyed full-year Gross Merchandise Volume revenue growth of 86% year-on-year. Its subscription revenue was up 53% year-on-year thanks to new merchants signing up. A combination of lockdowns, employment uncertainty and government money spurred many people to to start their own business or side hustle. This is good news for Shopify, but whether the trend will continue long term remains to be seen.

The company has also launched enhanced services such as Shopify Point of Sale (POS), which allows merchants to accept payments anywhere. POS includes inventory management, sales analytics and customer friendly purchase options. It also brings in money from fulfilment and payment services.

Risks to consider

Of course, there are risks too. A rise in inflation could affect e-commerce both from a consumer shopping viewpoint and if its business customers’ running costs outweigh their profits. This could be a problem if its merchants can’t afford to continue (or if its own costs escalate). It already offers Shopify Capital to help businesses stay afloat. This is its merchant cash advance and lending arm. That said, whether economies are booming or tanking, there will always be a new group of people looking to start their own business. Shopify makes it easy and affordable, which gives it staying power.

It has heavyweight competition in eBay and Amazon. But while they allow merchants to sell their wares only under the eBay or Amazon banner, Shopify gives full brand ownership to each merchant. 

Also, as with many US tech stocks, I’m concerned the share price is expensive. The price-to-book value is 23, whereas Amazon’s is 16. Shopify doesn’t pay a dividend to give long-term reassurance during dips either. The Shopify share price is down 18% from its February all-time-high. That’s a rapid decline. But many US stocks in the tech space are enduring a correction, and how long this will continue is unknown.

Should I buy Shopify shares?

I think Shopify is a fantastic product and a very customer-focused platform. It’s sleek, user-friendly and technologically advanced. For instance, its Shop Pay application allows merchants to accept payments directly from Instagram and Facebook. This seamlessly integrates the user’s experience with the brand. Features like this impress me.

I’d be happy to own shares in Shopify because I think it’s a powerful company with an even stronger future. But its high price (even after the share price decline) means that while I’m tempted to buy Shopify shares as a long-term investment, I’ll be waiting to see if it’s got further to fall. I do like its long-term outlook though, with merchant growth and subscription revenue increasing. I just need the right moment to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, 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 its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Kirsteen owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon, Facebook, and Shopify. The Motley Fool UK has recommended eBay and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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