Shopify: Stock of the Week

Why Shopify shareholders should be excited – and careful right now.

Andrew Willis 21 August, 2023 | 1:34AM
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Key Takeaways for Shopify Stock:

  • Both revenue and profits are up in the most recent quarter
  • Switching costs and a network effect contribute to a narrow moat
  • Shopify’s business is more susceptible to a recession than larger peers


Andrew Willis: Both revenue and profit are up at Shopify (SHOP). And forward-looking guidance is better than we expected. But there’s just about as much as there is to be excited about, as there is to be fearful for when it comes to Shopify stock.

On the one hand, we have a 30% increase in monthly recurring revenue, now up to $139 million dollars per month. And we see some lasting power to business with switching costs for customers and a network effect contributing to a narrow moat rating for Shopify stock.

But on the other hand, we’re worried about Shopify’s customers themselves. Shopify caters to small and medium-sized businesses but the failure rate for new businesses is very high – between 25 and 75% depending on the study and time period – and currently, interest rates don’t exactly encourage spending.

Shopify Stock Susceptible to a Recession

Looking ahead, senior equity analyst Dan Romanoff says he believes Shopify is more susceptible to a recession than more enterprise-focused peers in two ways: First, small-and-medium-sized customers are more likely to fail in a recession, and second, the value of gross merchandise volume processed on the platform is likely to be lower as consumers spend less.

But with all the warnings about small businesses in recessions past, we may be in different times with the growth of e-commerce and subscriptions. With so many businesses on Shopify Plus being e-commerce primarily, only or first, it may come as no surprise management boasts a 90% customer retention rate.

For Morningstar, I’m Andrew Willis


bulls Shopify Bulls Say

  • Shopify’s growth has been strong and is expected to remain so, with robust new merchant adds, increasing GMV, and high attach rates.
  • We believe Shopify is attractive for SMBs because it is simple to use and has a wide variety of built-in features that make it a turnkey solution.
  • The company has many experts to help SMBs with website design, photography, and other elements of the process and benefits from a large referral and developer ecosystem.

bears Shopify Bears Say

  • Shopify has traded at lofty valuations at times, and while it might continue to generate strong growth, the company may still fail to live up to optimistic assumptions embedded in the share price.
  • Shopify is overexposed to the economic cycle, with the high failure rate for core SMB customers exacerbated by the fact that retail volume would likely decline in a downturn. Additionally, management’s strategy is to avoid going direct to consumers.
  • The buildout of the Shopify Fulfillment Network will require substantial investment in both financial terms and management resources.


Image credits: Associated Press

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Shopify Inc Registered Shs -A- Subord Vtg87.17 CAD-1.74Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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