Should You Buy Shopify Stock Now or Wait for a Dip?

Key Points

• Shopify's revenue rose by more than 30% last quarter.

• The closing of the de minimis loophole, however, could impact its growth rate in future quarters.

• At around 80 times its trailing earnings, investors are paying a big premium to own the stock right now.

• 10 stocks we like better than Shopify ›

Did you know that it was about eight years ago today that short seller Andrew Left from Citron Research referred to Shopify (NASDAQ: SHOP) as a "get-rich-quick-scheme"? Ironically, investors who would have ignored that outlook and bought the stock would have been the ones to get very rich; Shopify's stock has grown by more than 1,300% since then, and a $10,000 investment in the business back then would have grown to be worth over $140,000 today.

Shopify established itself as a top e-commerce platform and it has merchants in around 175 countries. Its easy-to-use software is appealing to just about anyone looking to sell products or services online, even with limited technical abilities. The stock has been a phenomenal investment and it now trades around its all-time highs.

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But given its high value, is now still a good time to invest in the company, or are you better off waiting for a pullback in its price?

Image source: Getty Images.

Why Shopify could face some challenges ahead

Shopify's business has been doing well in recent periods, but there could be a slowdown coming in upcoming quarters. That's because on Aug. 29, the U.S. closed the de minimis loophole, which allowed low-priced goods to flow into the country without facing tariffs. With a strong global presence and many Shopify merchants selling products to U.S. customers, this policy change could put a significant dent in the number of transactions on Shopify's platform.

When Shopify last reported earnings, it was for the period ending June 30. At the time, its platform was thriving with gross merchandise volume rising by 31% to $87.8 billion for the quarter. That led to Shopify's revenue rising by a similar percentage, to $2.7 billion.

In its current quarter, investors will get an initial glimpse of how the business is doing amid the changes. But the key quarter to watch out for may be the last one of the year, where the closing of the de minimis loophole will impact the full three months, and also be amid the crucial holiday shopping season.

Its high valuation leaves no buffer for safety

Shopify faces question marks in the latter half of the year, but with a high valuation, investors shouldn't expect to have any margin of safety if they buy the stock right now. It's trading at a price-to-earnings multiple of around 82 -- far higher than the S&P 500 average of 25. The danger with buying it at its current level is that if there is a slowdown in Shopify's growth rate later this year, the stock could be vulnerable to a sell-off.

Year to date, Shopify's stock has risen by around 40% and it recently hit a new 52-week high. The last time it was trading around these levels was back in 2021. And when the company encountered a slowdown the following year, its valuation crashed by a staggering 75%.

I'd hold off on buying Shopify's stock

Shopify has a strong business and with a vast presence around the globe, it has tremendous growth opportunities to tap into over the long haul. But with a lot of uncertainty around trade and tariffs, I expect Shopify's business to slow significantly in upcoming quarters.

Although it's a good e-commerce stock to invest in for the long haul, it's always important to consider valuation when investing, to ensure you can set yourself up for a good long-term return while also providing yourself with a buffer in the event of a possible slowdown in business. If you bought Shopify's stock around its peak in 2021, you would just now be getting close to breakeven on your investment.

For now, I'd put Shopify on a watchlist as it's too highly priced given the uncertainty it faces ahead, and there are other growth stocks out there which may provide better value for investors today.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.