Shopify Is Now Cathie Wood’s Largest Holding. Is That a Buy?

Cathie Wood earned a reputation as a prescient stock picker when her flagship fund, Arka Innovations ETF (ARK 0.31%) more than doubled in 2020, as did the number of shares in several of its other actively traded ETFs.

In 2018, Wood also made a famous, absurd proposal Tesla to reach a split-adjusted price of $3,000, which is when the stock surged in 2020 to profitability.

Its earnings have been more disappointing of late, but growth investors still closely follow its performance, which Ark reports on daily, unlike most hedge funds.

For a long time, Tesla was Ark’s biggest stock, but that has changed. Now Wood has found a new favorite stock. It Internet shop (STORE 1.09%)Canadian e-commerce software giant.

Shopify fits Wood’s typical approach to investing, in that she looks for category leaders that are disrupting large industries, much like Tesla does for electric vehicles and Shopify does for e-commerce.

Shopify dominates the e-commerce software market, offering independent online sellers and even large corporations everything they need to run an online business, including a website, social media advertising tools, and the ability to accept payments, manage inventory, and handle financial reporting.

This has made it a reliable growth stock, but is Shopify worth buying now? Let’s first look at the Ark case for Shopify.

Arka on Shopify

Ark sees plenty of room in the market for e-commerce to continue to grow. The company noted in its 2022 filing that e-commerce only accounted for 14% of total retail sales, down from 11% in 2019.

Ark also noted that e-commerce sales in China as a percentage of total retail spending reached 44% in 2021, indicating that it could be significantly higher than in the U.S.

The investment firm said the U.S. has more retail space per capita than any other developed economy and predicts that a larger share of retail will 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. But e-commerce is still growing faster than brick-and-mortar retail, taking market share, though perhaps not as quickly as Ark had expected.

It also noted that the cost of a Shopify subscription is significantly less than the rent of a brick-and-mortar store at a comparable retail store. Ark makes a strong case for e-commerce growth, but that’s different than buying Shopify.

Where is Shopify today?

Shopify continues to see impressive growth, but its stock remains expensive, leaving investors with the same dilemma it has faced for much of its history.

The company reported second-quarter earnings, reporting revenue growth of 21% to $2 billion, driven by gross merchandise volume (GMV) growth of 22% to $67.2 billion.

After putting the Deliverr bug behind it, Shopify also reported GAAP earnings of $170 million, or $0.13 per share. On an adjusted basis, earnings per share were $0.26.

With gross merchandise volume now exceeding $250 billion, Shopify controls a significant share of the e-commerce market, and rapid growth may be harder. The best way for the company to grow its bottom line may be to expand into new value-added services and increase its collection rate, or the percentage of gross merchandise volume that converts to revenue, although its attempt to do this through logistics has not been successful.

Is Shopify worth buying?

Shopify dominates its e-commerce software niche, but the stock remains expensive with a price-to-sales ratio of 12.5 and a price-to-earnings ratio of 75.

The company still has a lot of growth potential, but it also seems fully valued based on its current performance. Shopify looks like a buy for long-term investors, but given its price, investors may be better off being opportunistic with the stock and buying into dips when they occur. This strategy has proven effective over the past year.