Winter is almost here. In between your hot chocolate and holiday parties, there's another holiday activity that's surely on your mind. Of course, I'm talking about shopping.
As the end of the year approaches, businesses are doing everything they can to entice shoppers to come through the door and take advantage of sales. While there are a number of ways to invest in holiday shopping patterns, I see Shopify (SHOP -1.62%) as a top e-commerce opportunity you'll want to have on your radar this December.
Let's dig into how Shopify is already dominating the holiday season, and assess why the company's momentum could very well continue.
December could be a huge month for Shopify
The final weeks of the year are loaded with holiday-themed shopping days. Here's a quick rundown if you need a refresher:
- Black Friday (the day after Thanksgiving)
- Small Business Saturday (the Saturday after Thanksgiving)
- Cyber Monday (the Monday after Thanksgiving)
In addition, the entire month of December features sales both online and in brick-and-mortar storefronts. Furthermore, let's not forget that many of these holiday-inspired discounts carry on beyond Christmas -- you know, for all of those gifts that you pretended to like but can't wait to exchange.
According to Shopify's management, the company has already kicked off the holiday season in record fashion. Merchants on Shopify generated $11.5 billion in gross merchandise volume between Black Friday and Cyber Monday -- representing an increase of 24% year over year and a new record for the company.
On the surface, this is encouraging because it showcases Shopify's growing presence in the commerce landscape. However, I actually see something more subtle here.
Remember, the last few years have been tough on the consumer given abnormally high levels of inflation and rising interest rates. But with inflation beginning to show consistent signs of cooling down and the Federal Reserve finally instituting an interest rate tapering policy, consumer purchasing power is gradually bouncing back.
I see the activity generated through Shopify between Black Friday and Cyber Monday as an encouraging proxy for what's to come throughout the month of December, as last minute shoppers finalize their gifting.
But don't just take my word for it. Emarketer is estimating that holiday retail sales will grow by 5% in 2024, reaching a total of $1.4 trillion. Given Shopify's dual presence online and in stores via its point-of-sale (POS) system integrations, the company is well-positioned to take advantage of holiday shopping via both e-commerce and brick-and-mortar retail stores.
Image source: Getty Images.
Taking a look at Shopify's valuation
One of my biggest challenges when assessing an investment in Shopify has always revolved around valuation. While the company is finally generating positive net income and free cash flow on a consistent basis, both values are yet to truly scale. For this reason, assessing Shopify on measurements of profitability just isn't useful in my eyes.
SHOP PS Ratio data by YCharts
In the chart above, I've benchmarked Shopify against a wide peer set of companies with strong e-commerce or retail footholds on a price-to-sales (P/S) basis. Even by this measure, Shopify is the most expensive stock among its cohort and it's not even close. Moreover, the trends illustrated above underscore that Shopify stock has witnessed some outsized valuation expansion over the last couple of months as well.
Is Shopify stock a buy right now?
While I'm comfortable saying that Shopify is a pricey stock, I'm going to take this analysis one step further to help assess if now is a good time to buy shares.
SHOP PS Ratio data by YCharts
The chart above reflects the change in Shopify's stock price between Thanksgiving 2023 (Nov. 23, 2023) and Jan. 31, 2024. As you can see, shares of Shopify rose considerably just after Thanksgiving and the momentum continued through the end of the year. However, shortly after the holidays passed, shares of Shopify fell off a cliff.
To me, this type of price action screams momentum trade. As a long-term investor, I do not want to get caught up in a bullish holiday-driven narrative that could fuel the interest of day traders and lead to outsized swings in momentum of Shopify stock.
Although I see Shopify as a good stock to monitor as the holiday season kicks into gear, I think there are better entry points into the stock.
