Cathie Wood Is Still Buying Shopify Stock. Should You?

Cathie Wood has made a name for herself as a disruptive tech investor. She’s not afraid to make risky moves, which makes it exciting to follow her portfolio. She hasn’t always been right, but her investing thesis often needs time to play out.

Shopify (SHOP 0.05%) is one of her favorite stocks. She has positions in three of Ark Invest’s exchange-traded funds (ETF): 3.75% of the flagship Ark Innovation ETF2.87% of the Ark Next Generation Internet ETFand 9.07% of the Ark Fintech Innovation ETFits largest position.

It’s actually her largest position overall, accounting for 12.75% of the weight of all of her ETFs, but she was still buying shares of Shopify again this week. Should you follow her lead?

Why does Cathie Wood love Shopify?

Cathie Wood invests in disruptive technology stocks. While some of them are already household names, others are just getting started. Her approach is forward-thinking and often at odds with general market sentiment.

Consider Shopify. It has a niche approach to e-commerce; it doesn’t sell its own products, but it powers other e-commerce retailers with a comprehensive array of solutions to service almost any budget between small business and enterprise customer. This focus puts it into the category of retail disruptor.

Wood told Bloomberg in an interview that “Shopify really started the social commerce revolution,” enabling social media companies to enter e-commerce through its tech-driven platform. She expects e-commerce to move up from 15% of retail sales today to 50% in the near future, and Shopify should be a main driver as well as beneficiary of the trend.

Shopify management sees this opportunity, too. It’s making progress in international expansion, and international merchants increased 30% year over year in the second quarter. Shopify is launching new and improved features to keep its dominant spot in e-commerce software and capture market share, such as a unified platform for all client solutions.

The company continues to report robust growth despite a sagging retail climate. Because it powers other retailers, it has more resilience than the standard product seller. Seller clients need their services even under poor circumstances.

However, most of Shopify’s revenue comes from payment processing, not the subscription fees that clients pay, which only account for about 15% of total revenue. When clients process less volume, Shopify takes in less revenue. That’s why subscriptions solutions revenue increased 27% year over year in the second quarter, outpacing 21% total revenue growth.

Cathie Wood might be buying more shares in anticipation of lower interest rates boosting the economy and Shopify’s business. The company’s stock is down about 4% this year, and it could be ready to jump higher.

What to be concerned about

Shopify stock has been volatile over the past few years as it tries to keep up growth while becoming profitable. It overshot when it built out to meet rising demand, and it’s making the right moves now to downsize to current demand.

The cost-cutting is already showing up on its financial statements. Operating income was $241 million in the second quarter, up from a $1.6 billion loss last year. It generated $333 million in free cash flow, and net income totaled $171 million. Things are moving in the right direction, but it’s something to keep an eye on.

There’s also something else to be worried about, which is valuation. Shopify stock trades at a price-to-sales ratio of 13 and a forward P/E ratio of 55. That’s a premium valuation, and it implies market confidence in Shopify’s potential. However, it also leaves little room for mistakes. When Shopify’s results haven’t been perfect, the stock has dropped dramatically.

At this price, Shopify stock could be a buy for risk-tolerant investors like Cathie Wood. It’s a bull-market buy, and as interest rates begin to come down, Shopify stock could rise regardless of its high valuation. But if you don’t have the stomach for volatility, it’s probably not the best candidate for your portfolio.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.