Shopify Inc.'s (SHOP, Financial) stock surged by nearly 10% on Wednesday after the e-commerce giant revealed increased pricing plans for the new year.
According to the Canadian company's management team, its broad-based product prices will increase by up to 33% this year, resulting in the Shopify's first notable price increase in over a decade.
An isolated case suggests that Shopify's price increases could add value to its income statement, assuming its product demand is sustained. However, a secondary observation indicates the company's ability to steepen its prices means it hosts a powerful market position, allowing it to exercise pricing power over its buyers. As such, Shopify could enhance its economies of scale this year, concurrently bolstering its investors' residual value.
Based on Wednesday's share price action, Shopify's latest price hikes have been interpreted in a bullish fashion by the financial markets. However, let us dive deeper into the event and a few of the company's key metrics.
Demand destruction or profits galore?
As mentioned, the sudden increase in product prices strengthens the possibility of demand destruction. Thus, it is fair to debate whether Shopify's latest move will add absolute value to its profit and loss statement in the near term.
According to analysis from Baird analyst Colin Sebastian, the company will be able to resume its sales growth with higher-priced products. In a recent note, he wrote, "We do not think these prices warrant a change for the vast majority of merchants, given the time and effort required to shift platforms, and our view that Shopify's platform, in many respects, offers superior e-commerce functionality at a reasonable price."
While new sales need to be considered, and even though it can be argued that platform switching is easier than it used to be, Sebastian's argument is hard to dispute as Shopify's user-friendly platform is accommodated by best-in-class integrated features at the click of a button.
Despite the fact platforms such as Wix offer similar features, Shopify's offerings are considered superior by small business owners, as illustrated by key data points. For instance, the company is second only to Amazon.com Inc. (AMZN, Financial) in the most widely utilized e-commerce platform rankings and ranks top of the pile in usage distribution.
Furthermore, Shopify faces close competition from WooCommerce, with the latter being more prevalent among higher-volume websites. Nevertheless, the two companies' concepts differ as Shopify's drag-and-drop model offers a differentiated option to WooCommerce's "blank slate" configuration, which requires additional hard-line integration. Thus, it is unlikely the two companies are in direct pricing competition; instead, they serve entrepreneurs with differentiated needs.
Lastly, a top-to-bottom approach implies the time is right for Shopify to increase its prices. The company's three-year revenue compound annual growth rate of 52.7% conveys little risk of adverse price elasticity. Additionally, the small-to-medium-size enterprises sphere is growing at 5.47% annually, meaning Shopify serves an expanding market with robust organic growth.
Support from Wall Street
A drift away from the company's physical operations and into its stock's prospects reveals positive signs to investors. In particular, Wall Street analysts and independent research analysts think Shopify's stock will be much sought-after during 2023.
Deutsche Bank recently issued a bullish call on Shopify with one of the bank's analysts, Bhavin Shah, writing, "Many leading brands are now actively looking to migrate or are in the process of migrating over from legacy/competing solutions, and we note this is in sharp contrast to our conversations over the last twelve months which consistently highlighted the pace of migrations slowing."
In an ambitious yet reasonable call, Deutsche believes the stock could exceed the $50 mark.
Furthermore, an independent research firm, Hedgeye, recently published a bullish comment on Shopify, also alluding to its product offerings by stating, "SHOP is continuing to add new customers, upsell features are gaining traction, core engagement data is strong, and profitability is returning to focus."
A bird's-eye view reveals analysts are optimistic about Shopify's product range and think the stock is severely undervalued after its sharp selloff last year.
Valuation is a risk
In spite of Shopify's positives, its stock remains fundamentally overvalued. For instance, its enterprise value-to-Ebitda multiple of -14.85 is one of the worst in its peer group, which is of grave concern as the Ebitda line item is a critical component of a technology company's income statement due to its exclusion of subjective depreciation and amortization.
With a beta coefficient of 2.14, Shopify is essentially a leveraged bet on the Nasdaq. Therefore, investors need to hope the financial market is in a risk-on mood this year, as systemic support will be needed to phase out the asset's valuation concerns.
Shopify's stock has surged amid news the company will raise its product prices.
The company's key operational features suggest a price increase might be welcomed by its income statement, consequently bolstering the stock's prospects. However, investors need to pay attention to Shopify's unaligned valuation metrics, which could be detrimental to the stock if the market assumes a risk-off trajectory.