Shopify Is Now Cathie Wood's Biggest Holding. Is It a Buy?
Cathie Wood developed a reputation as a prescient stock picker as her flagship fund, the Ark Innovation ETF (NYSEMKT: ARKK) more than doubled in 2020, along with several other of her actively traded exchange-traded funds (ETFs).
Wood also famously made an outlandish call in 2018 for Tesla to hit a split-adjusted price of $3,000, which it did when it soared in 2020 as it turned profitable.
More recently, her returns have been more underwhelming, but growth stock investors still follow her moves closely, which Ark shares every day, unlike most hedge funds.
For a long time, Tesla was Ark's biggest holding, but that's changed. Now, Wood has found a new favorite stock. That's Shopify (NYSE: SHOP), the Canadian e-commerce software giant.
Shopify fits Wood's typical investing approach as she tends to look for category leaders who are disrupting large industries like Tesla is with electric vehicles (EVs), and Shopify is with e-commerce.
Shopify dominates the market for e-commerce software, helping independent online retailers and even large corporations with everything they need to run their business online, including a website, tools to help advertise on social media, and the ability to accept payments, manage inventory, and handle financial reports.
That's made it a reliable growth company, but is Shopify a buy now? Let's take a look at Ark's case for Shopify first.
Image source: Getty Images.
Ark's case for Shopify
Ark sees a lot of room in the market for e-commerce to continue to expand. The company observed in a 2022 paper that e-commerce only accounted for 14% of total retail sales, up from 11% in 2019.
Ark also noted that e-commerce sales as a percentage of total retail expenditures have reached 44% in China as of 2021, showing that they could be significantly higher than they are in the U.S.
The investment firm said that the U.S. has more retail square footage per capita than any other developed economy, and it predicted that more retail share would shift to e-commerce as stores close. That doesn't seem to have happened yet as brick-and-mortar retailers have adapted and introduced omnichannel features like online pickup. However, e-commerce continues to grow faster than brick-and-mortar retail sales, taking market share, though maybe not as fast as Ark expected.
It also observed that the cost of a Shopify subscription is much cheaper than brick-and-mortar rent for a comparable retail store. Ark makes a strong case for the growth of e-commerce, but that's different than Shopify being a buy.
Where Shopify stands today
Shopify continues to deliver impressive growth, but the stock remains expensive, presenting the same dilemma to investors that it has for much of its history.
The company delivered a strong second-quarter earnings report with revenue up 21% to $2 billion, driven by s gross merchandise volume (GMV) growth of 22% to $67.2 billion.
After putting the Deliverr mistake behind it, Shopify also reported generally accepted accounting principles (GAAP) earnings of $170 million or $0.13 a share. On an adjusted basis, earnings per share reached $0.26.
With a run-rate gross merchandise volume now above $250 billion, Shopify controls significant market share in e-commerce, and growing at a high rate may get more difficult. The best way for the company to grow on the bottom line may be to expand to new value-added services and increase its take rate, or the percentage of gross merchandise volume that converts to revenue, though its attempt to do that through logistics failed.
Is Shopify a buy?
Shopify dominates its niche of e-commerce software, but the stock is still expensive at a price-to-sales ratio of 12.5 and a price-to-earnings ratio of 75.
The company still has ample opportunity for growth in front of it, but it also seems fully valued based on its current performance. Shopify looks like a buy for long-term investors, but given its price tag, investors may be better off being opportunistic with the stock and buying it on pullbacks as they come up. That strategy has worked well over the past year.
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Jeremy Bowman has positions in Ark ETF Trust - Ark Innovation ETF and Shopify. The Motley Fool has positions in and recommends Shopify and Tesla. The Motley Fool has a disclosure policy.
