At this point, I can understand why an investor would decide to just leave Shopify Inc (US) (NYSE:SHOP) stock alone. Shopify stock has been incredibly volatile since a short attack sent it tumbling. Shopify earnings on Halloween looked impressive and SHOP stock still fell.
It’s a dearly-valued stock, 14x revenue even backing out net cash, in what looks like a dearly-valued market. And after a 7.5% decline Wednesday on what looks like basically zero news, an investor would be forgiven for thinking a better price will be on the way soon.
That may be the case, but then again that’s always the case. And from a long-term standpoint, investors shouldn’t forget that Shopify remains one of the best growth stories in the market.
The short case made a few good points – but as I argued at the time, had basically nothing to do with the core business model. Shopify Q3 earnings did beat consensus handily. The company still is guiding for 69% revenue growth this year, and analysts are expecting 300% EPS growth next year.
The point is that the story behind Shopify stock remains intact. And it will reward investors willing to ride out the current choppiness.
The Risks to Shopify Stock
To be clear, SHOP stock isn’t a slam-dunk, particularly in the near term. Valuation is steep, as noted. And in the past few sessions, investors look like they’re taking some money off the table, particularly in high-flying stocks.
Even Shopify’s fellow small business provider Square Inc (NYSE:SQ), one of the market’s hottest stocks through this month, has come in 20%+ in a matter of sessions. Broad market indices are holding strong, but there does seem to be a rotation out of high-risk, high-valuation plays like Shopify stock.
More specifically, there’s still a sense that Shopify hasn’t quite answered the allegations made by Citron Research back in October, as Tom Taulli argued on this site this week. And with Citron promising a follow-up report, investors may be waiting for the other shoe to drop.
SHOP Stock Isn’t Played Out
For the most part, however, the concerns surrounding SHOP stock look more like noise than anything that really affects the business model. Citron’s allegations about potential marketing violations, even if proven, likely would result in a fine in the $100-$200 million range at most.
Past penalties on companies like now-private LifeLock and, more notably, Herbalife Ltd. (NYSE:HLF) are good examples. And Herbalife’s marketing, for which it paid a $200 million penalty, was a central part of its business model, not a small affiliate effort as is the case for Shopify.
Meanwhile, growth continues. Shopify earnings have turned positive, and should grow sharply next year. GMV (gross merchandise value) on Black Friday cleared $1 billion, as Luke Lango pointed out this week.
That strength shows the power of Shopify’s business model. Demand is moving toward smaller, independent retailers. There’s a reason why Shopify revenue is growing so fast. And the nature of that model means that revenue growth will turn into explosive profit growth.
Shopify stock isn’t cheap by traditional measures. But as long as those merchants are having success, SHOP stock will grow into the steep valuation.
Stay the Course on SHOP Stock
There is a case for caution here, to be sure. As such, investors might want to consider selling puts. The April 2018 100 put, for instance, is bid at $10, providing an 11% return and an entry point of $90.
But I still think there’s a case for a straight purchase of SHOP stock. Even amid the volatility, support has held around $95, not far below current levels. The overhang of the short case will dissipate at some point.
A strong holiday season should boost Shopify earnings for Q4 and remind investors why they were so excited about Shopify stock to begin with.
The concerns surrounding SHOP are similar to those seen at most growth stocks. The difference is that even those growth stocks don’t have the opportunity Shopify does. And the recent volatility gives investors a chance to own that opportunity at a still-reasonable price.
As of this writing, Vince Martin has no positions in any securities mentioned.