Investors Should Stay Patient With Shopify Inc (US) Stock

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Shopify Inc (US) (NYSE:SHOP) stock had a nice run going in 2017. By mid-September, Shopify stock had nearly tripled year-to-date. But a bear attack and Shopify earnings last month have interrupted the run, and SHOP stock has pulled back roughly 20% from its highs.

Investors Should Stay Patient With Shopify Stock

But I still think Shopify stock is worth riding out the current volatility. The short case made publicly by Citron Research had a few good points, but those points had no bearing on the Shopify business model. If anything, the pullback created an opportunity, as Shopify stock dipped back below $100.

The same seems true of Shopify earnings, to which investors again reacted poorly. The report was strong and even beat expectations, yet SHOP stock fell 9% the following day.

Valuation admittedly is high, even after the recent pullback. But few, if any, companies have Shopify’s growth potential. And that potential still doesn’t look quite priced in.

Shopify Earnings

Fundamentally, there doesn’t seem anything at all wrong with Shopify earnings for Q3. Revenue rose 72%, six points better than the Street projected. Subscription revenue rose 65%, and merchant solutions revenue (mostly fees from payment processing) climbed 79%. The combination should be good news. Payment revenue per merchant is rising, implying that merchants on the platform are having more success.

Earnings beat consensus by $0.06, with Shopify posting its first-ever GAAP profit. Operating expenses continue to climb as Shopify invests in growth, but gross margin improved. Q4 guidance is for 59% top line and an adjusted operating profit, and Shopify typically has outperformed its guidance.

The numbers should have been good enough to move SHOP stock higher, particularly given that SHOP had only retraced about half its post-Citron decline. But clearly, investors saw concerns in the report and on the conference call.

SHOP Stock Concerns

Shopify did address Citron’s argument on the Q3 conference call, as CEO Tobi Lütke had promised in a tweet last month. Lütke called Citron’s Andrew Left “a short-selling troll who made all sorts of preposterous claims.” The CEO insisted that Shopify followed all FTC regulations and was not selling “business opportunities,” contrary to Left’s allegations of potential violations.

But Shopify doesn’t appear to have satisfied all of investors’ concerns. Left raised questions about the company’s “churn” — how many and how quickly subscribers were leaving the platform — but Shopify didn’t give specific figures, as some analysts and investors were hoping.

The larger concern might go beyond Citron’s short case, however. Shopify seemed to make an effort to dampen expectations for the first quarter. The company cited seasonal pressures on merchant solutions revenue as providing a headwind toward sequential growth in Q1. And CFO Russ Jones told an analyst in the Q&A that he didn’t expect profitability in Q1, due to further investment in the business.

The call was enough to spook investors, leading to the post-earnings selloff. Given the high valuation here, that’s not necessarily a surprise. But I still think that selloff is a bit of an overreaction.

Growth Stock Problems and Potential

After all, Shopify stock still trades at nearly 14x revenue, even backing out roughly $1 billion in net cash, one of the highest multiples in the market. SHOP trades at over 100x 2019 analyst EPS estimates.

But Shopify also has one of the best growth profiles in the market and years of growth ahead. Shopify Shipping and Shopify Capital offer additional opportunities beyond the core platform at better initial margins. Long term, margins should expand as customer acquisition costs are leveraged. This is a company that literally has years of growth in front of it. And as seen at Square Inc (NYSE:SQ), investors will pay up for that growth.

At the end of the day, SHOP stock is a growth stock. Growth stocks generally hit patches of volatility. The trick is to figure out when investors are a little rattled and when they have real reason to be concerned. The noise surrounding Shopify stock of late looks a lot more like the former than the latter.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/shopify-stay-patient/.

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