Editor's note: A previous version of this article contained the wrong name for Deliverr.
Despite inflation, hiked interest rates, and a busted housing market, the American consumer has remained surprisingly resilient. The Consumer Price Index, the standard metric for inflation, rose 3.7% in September. This was on par with the August increase, and slightly lower than August when taking out food and energy prices.
But retail spending is strong, and so is e-commerce, which is great news if you own shares of Shopify (SHOP -5.62%), the popular platform for online stores.
Americans are still spending
According to data for the month of September, retail spending increased 0.07% from August and 3.8% from last year -- outpacing inflation. These numbers will impact the Federal Reserve's decision whether or not to hike interest rates again when it meets in a few weeks. The purpose of raising interest rates is to curb spending, thus reducing inflation. And if done correctly, it can achieve its goals without causing a recession.
It seems like that's where we're headed, with many experts now saying there is little chance of a recession happening soon. Some indications point to much of the spending coming from wealthy people spending on services and experiences. However, the right labor market is also a show of strength for the average American.
The future of e-commerce
In what's even better news for Shopify, e-commerce is outpacing overall spending. Although the U.S. Department of Commerce didn't break out e-commerce sales in the September retail sales report, they increased 2.1% in the 2023 second quarter, when overall retail sales remained essentially flat year over year.
After a massive rise early in the pandemic, followed by a distinct drop, e-commerce sales are still making their way back up.
Image source: U.S. Department of Commerce.
But it's going to keep getting better. According to Statista, e-commerce sales are projected to increase at a compound annual growth rate of 11.2% through 2027, hitting a market penetration of 66.6%, up from 57.2% this year.
Where Shopify fits in here
Shopify is one of the world's largest e-commerce platforms. It processed $55 billion in gross merchandise volume (GMV) in the 2023 second quarter. To get a sense of where that falls on the spectrum of e-commerce sales, leader Amazon processed $53 billion in online store sales in the quarter as well as $32 billion in third-party sales. Walmart took in $21.3 billion in total e-commerce sales over a similar period. Shopify is a platform for client sales, which is why I'm comparing its GMV to Amazon's and Walmart's sales.
Shopify is growing faster than both Amazon and Walmart, and many other e-commerce retailers. GMV increased 17% year over year in the second quarter, and revenue, which is its piece of the GMV pie, increased 31%. As e-commerce continues its upward tick, Shopify is poised to benefit.
Should you buy Shopify stock?
Here's where it gets more unclear. Unlike Amazon and Walmart, Shopify is struggling with profitability. It built out quickly when sales surged early in the pandemic, but it overshot. It had acquired a logistics company as part of that development, which under different circumstances could have been a smart move. But as demand waned, expenses piled up, and management took a few steps backward. That involved cutting thousands of jobs and selling off the logistics network, Deliverr.
Shopify is still feeling the consequences. Its operating loss was $1.6 billion in the second quarter although that included $1.7 billion in charges related to the sale. Coming into the third quarter, it's positioning itself for new growth and improved profitability.
Momentum is building, and Shopify stock is up 56% this year. At this price, shares trade at 11 times trailing-12-month sales, which is a hefty valuation. It means investors are excited about this stock. But Shopify stock is actually down about 20% over the past three months, at least partially because it can't really support such a high valuation considering the environment and its performance.
However, the future looks very bright for Shopify. I wouldn't recommend buying it right now, but I definitely suggest keeping it on your watch list and waiting for a more attractive entry point.
