Shopify Inc (US) (NYSE:SHOP) has hit a crossroads. Shopify stock has enjoyed great success as the best-known e-commerce platform that’s simple to use.
However, a negative report from Andrew Left at Citron Research in early October stopped stock growth in its tracks. The stock has yet to recover from the pre-Citron call and remains range bound. Given the range and high valuations, Shopify stock should only be bought at the low end of the range.
Shopify Growth Driven by Being the “Anti-Amazon”
In a previous article, I talked about its relation to Amazon.com, Inc. (NASDAQ:AMZN) and referred to Shopify as the “anti-Amazon.” Shopify is the play for businesses large and small that want to set up their e-commerce platform independent of the world’s largest e-commerce retailer.
And while Shopify has competitors such as WooCommerce and Magento, SHOP remains the biggest platform that does not require business owners to spend large amounts of time on setup and maintenance of their e-commerce site.
While growth has now fallen under 100% per year, it remains impressive. In its 3Q earnings report released in November, the company grew year-over-year revenue by 72%. Shopify earnings also turned positive as the company reported an EPS for 3Q at five cents per share.
Shopify also reported a strong Cyber Monday. It reported that Shopify clients brought in up to $1 million per minute in revenue on that sales day. Last year, the sales rate peaked at $556,000 per minute. SHOP reported Cyber Monday also saw the sale of nearly 1.2 million items through its platform.
Citron’s October Report Still Hangs Over SHOP Stock
Still, the call by Citron in early October hangs over the stock. Shopify stock traded at about the $120 level before Citron turned negative. Afterward, the stock fell into the mid-$90s per share and has been stuck in a range since. SHOP stock currently trades around the $105 level but has twice fallen back from higher levels in the last three months.
Shopify’s response to Citron could have been the cause of one sharp drop in SHOP stock’s value. The company waited until earnings to respond to the Citron report and gave what many perceived as a weak response. The stock dropped 10% after the report despite beating earnings. Citron has indicated a response is forthcoming. However, the $58 per share call has not come to pass.
One overhang with Shopify stock that cannot be avoided is valuation. While valuation hasn’t stopped stock growth for the likes of Amazon, Netflix, Inc. (NASDAQ:NFLX) or Tesla Inc (NASDAQ:TSLA), it remains a factor that causes concern.
SHOP stock trades at over 10 times book value and a price-to-sales (PS) ratio reaching almost 17. In comparison, Netflix’s PS ratio falls just short of 8, and Tesla’s stands at around 5. While a 72% growth rate can take down that PS ratio in a short amount of time, it still increases risk.
Coatue Sees the Citron Call as a Buying Opportunity
Still, some are dismissing Citron and the high valuation. Our own Will Ashworth reported that hedge fund manager Philippe Laffont of Coatue Management LLC had purchased 8.2% of the Class A shares of Shopify stock. Coatue purchased the majority of these shares after Citron made its $58 per share call in October.
However, these share purchases took place six to ten weeks ago, likely at the lower end of the current range. Now, the stock has increased in value by over 10%. Here, I’d urge caution as the stock remains range bound.
The stock has not fallen below the mid-$90s per share since the Citron call. It has also not reached its pre-Citron report price of around $120 per share. If the stock breaks below the range, it indicates Citron made the right call. If it can reach or exceed the $120 level, the stock returns to its growth path.
Final Thoughts on Shopify Stock
With the stock range bound and trading at a high valuation, traders should approach Shopify stock cautiously. The company has enjoyed success as one of the better e-commerce platforms by which small businesses can compete with Amazon. However, high valuations and a negative call by a respected investor have left the stock range bound.
As long as SHOP stock trades in its current range, it should only be purchased at the low end of the range (and subsequently sold if it falls below the range).
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.