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Why Shopify Stock Could Eventually Live Up to the Hype

Sooner or later investors will want to see a sizable bottom line, but for right now, the euphoria is enough

By James Brumley, InvestorPlace Feature Writer

In an e-commerce environment that’s dominated by, Inc. (NASDAQ:AMZN) and a discussion of whether or not Wal-Mart Stores Inc (NYSE:WMT) will ever be able to make a dent in Amazon’s market share, it’s easy to forget there are other names like Shopify Inc (US) (NYSE:SHOP) out there. They are indeed out there though, and Shopify stock may well be worth a look as it tries to figure out how to compete with powerhouses like the aforementioned Wal-Mart and Amazon,

What Shopify Stock Lacks in Actual Value it Makes Up For in Story
Source: Shopify

Case in point:

In short, there’s a reason Shopify stock has gained nearly 180% over the course of the past twelve months. There’s also a reason to suspect more gains are in the cards sooner or later. Yet, most investors are still unfamiliar with this company’s amazing story.

Fundamentals Don’t Quite Matter Yet

Calling a spade a space, the current SHOP stock price of $120.27 is fundamentally ridiculous. It’s projected to lose four cents per share this year, and even if it does swing to the expected operating profit of 21 cents per share of Shopify stock next year, its trailing price/sales ratio of 23.4, versus the market norm about a 2.34, leaves it miles away from turning the kinds of profits one would expect for a $120 stock.

For the time being, however, this isn’t a fundamental story. This is a growth story and in some ways just a feel-good story and that’s enough.

Shopify, in simplest terms, has taken the pain and headache out of building online stores. Entrepreneurs who have otherwise shied away of e-commerce can easily get into the arena by leaning on Shopify’s tools.

It’s been done before, to be fair. To be completely fair though, it’s never been done quite as well as Shopify has done it.

But why, pray tell, have we seen such a massive runup to the current SHOP stock price in excess of $120 from an IPO price of $17 just a little less than a year and a half ago? Because there’s good reason to believe this may be one of the rare, one-in-a-hundred companies that actually lives up to its hype and grows into the stock’s actual price, even if that time is years away. In the meantime, the growth pace is enough.

Results, Past and Projected

Take any analyst outlook for any new company with a grain of salt, as even these pros don’t always fully understand the risks and competitive environment for a whole new kind of company. [Remember, analysts used to be in love with Twitter Inc (NYSE:TWTR) too.] In the case of Shopify though, the optimistic outlooks simply are an extension of growth trends that have already been established.

Shopify is already growing sales at breakneck speed. And, unlike many of its peers at its age, the losses are getting smaller rather than larger.

Questions remain, to be sure. Chief among them is exactly what Shopify thinks is going to happen in late 2018 to drive a surge in earnings growth that’s not exactly matched by a surge in revenue? The answer is a sharp relative decline in its costs of sold goods (services delivered, in this case) and lowered research and development expenses. Those are tough expenses to handicap though, and are hardly etched in stone.

Thing is, neither the company nor analysts have to be spot-on with their outlooks… one of the perks of being a new company sporting a lot of growth. Investors are lenient when it comes to the small things as long as you get the big things right. In this case, the big thing is revenue growth and continued earnings progress.

Bottom Line for Shopify Stock

As much as Shopify’s story is less about results and more about trajectory, it would also be amiss to not point out that investors’ new-found zeal for SHOP stock is also something of an indirect, and maybe even subconscious, jab at Amazon and the likes of rivals eBay Inc (NASDAQ:EBAY) and Etsy Inc (NASDAQ:ETSY), each of which have successfully irritated many of their best vendors.

Etsy’s most recent scuttlebutt is forcing its sellers to use its unpopular, home-grown payment system. eBay recently dropped tools like Selling Manager and Selling Manager Pro, which were well liked. Meanwhile, Amazon’s new refund policy could very well force its smaller sellers off the site altogether.

And these are just a handful of examples that point to a growing dismissive attitude about smaller players. In sum, they all set the stage for a seller-friendly e-commerce solution. Shopify is filling that void. Its growing top line is evidence of that reality, though that’s not even the whole reason Shopify is growing like it is.

Sure, there will come a time when the pace of growth slows down and interested eyes will refocus on the bottom line rather than the top line. That time seems well down the road though. For the time being, Shopify stock has all the makings of a great trade.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.

Article printed from InvestorPlace Media,

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