Is Shopify Stock a Buy, Sell, or Hold in 2025?

Source The Motley Fool

Shopify (NYSE: SHOP) has arguably become the most prominent U.S.-based e-commerce stock behind Amazon. A fast, easy-to-use sales site and an extensive ecosystem helped it stand out above most other e-commerce platforms.

While the stock experienced modest gains over the last year, it has risen nearly 300% from its bear market lows in 2022. Despite those healthy gains, it sells at more than a 40% discount from its all-time high set in 2021.

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Considering the state of its business and financials, the question of whether Shopify stock is a buy, sell, or hold likely warrants a deeper dive.

The state of Shopify's stock

At this point in Shopify's history, it appears to have moved on from a mistake earlier in the decade that likely compounded the stock's huge pullback in 2022.

The decision to create an ecosystem of services for online merchants has served it well on balance. Add-ons such as payment services, online marketing, and sales tracking have allowed Shopify to drive added revenue from its existing customer base. So successful is this approach that 72% of the company's revenue in the first nine months of 2024 came from this merchant services segment.

Nonetheless, it likely took merchant services too far when it started the Shopify Fulfillment Network (SFN). Aside from the fact that fulfillment and shipping are far outside its core software business, such a business also involves massive fixed costs. Consequently, those costs made Shopify a money-loser after having recently turned profitable.

Seeing the effects on the overall business, Shopify sold the SFN. Although it still exists in name, a company called Flexport owns and manages that part of the operation. That has given Shopify the best of both worlds, giving its customers fulfillment services while allowing the company to return to profitability.

Also helping Shopify is the outlook for the e-commerce industry. To that end, Grand View Research forecasts a compound annual growth rate (CAGR) for the e-commerce industry of 19% through 2030. If that prediction is anywhere close to coming true, it should bode well for Shopify's revenue and, ultimately, its stock performance for years to come.

Shopify's financial changes

As mentioned before, the stock still trades at a considerable discount from its record high. Unfortunately for investors, its growth rate slowed significantly over the last decade, making a recovery more challenging.

In the first nine months of 2024, Shopify's $6.1 billion in revenue rose 23% from year-ago levels. While impressive, it lags the 47% revenue growth rate in the first three quarters of 2019, before the pandemic.

Nonetheless, as mentioned before, Shopify now has something it did not have in 2019: a positive net income. Its $726 million in profit in the first three quarters of 2024 is up from the $525 million loss in the same year-ago period. Moreover, even though analysts predict a 23% revenue growth rate in 2025, it could spark a more significant growth in net income that could take its stock price growth higher.

The valuation metrics offer a more mixed picture. Its P/E ratio is 97, and even when looking at the price-to-sales (P/S) ratio, it is still at a relatively high 16 times revenue.

Still, Amazon routinely sold at a higher P/E ratio in its growth phase, implying Shopify could sustain such an earnings multiple. Additionally, Shopify stock often sold for above 40 times sales during the pandemic, so its sales multiple is still far below record highs. This indicates improving financials and expanding multiples could still take Shopify stock higher in the foreseeable future.

Should you buy, sell, or hold Shopify stock?

Under current conditions, Shopify stock should remain a buy. Admittedly, the rising valuation and the slowing growth in recent years might turn investors cautious, and for that reason, new buyers should consider a dollar-cost averaging approach to buying.

However, Shopify has become one of the most impactful online shopping platforms in both the U.S. and the world, and the e-commerce industry is on track for continued growth for at least the rest of the decade. That should bode well for investors and could spark a continued recovery in the stock that takes it back to its record highs and beyond.

Should you invest $1,000 in Shopify right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has positions in Shopify. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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