Not long ago, Shopify Inc (NYSE:SHOP) was looking dicey. Short-seller Andrew Left — who operates Citron Research — put out some hard-hitting analysis on the company. He indicated that the marketing practices were sketchy and that the transparency was far from adequate.
But despite all this, the bulls have won — and in a big way. For the year so far, SHOP stock is up about 47%. This is better than other high-profile tech operators like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and even Amazon.com, Inc. (NASDAQ:AMZN).
The latest earnings report was certainly a big catalyst for SHOP stock. During the fourth quarter, revenues soared by 71% to $222.8 million, and earnings came to 15 cents a share. The Wall Street consensus was for the top line to come in at $208 million and earnings to reach five cents a share. All in all, the company was able to pull off a standout holiday season.
This growth has been no fluke. The company, which was founded 2004, was prescient in focusing on the cloud-based e-commerce market.
Along the way, Shopify has continued to innovate and make its platform easier to use, which has been critical for its base of small and medium-sized businesses. Another key has been finding ways to expand distribution, such as with partners like Facebook, Inc. (NASDAQ:FB) and eBay Inc (NASDAQ:EBAY).
Here’s how InvestorPlace contributor Luke Lango has put it:
“In this sense, the stock is a pure play on two really big secular trends: the widespread adoption of cloud-hosted solutions, and the rampant rise in digital commerce. The other company which has made a killing off those two secular trends? Amazon. The connection seems natural, and therefore, the upside for Shopify stock seems highly enticing.”
Risks With SHOP Stock
I think there are some nagging issues with SHOP stock. First of all, there are clear differences with AMZN, which has proven adept at evolving into different businesses.
Just look at Amazon’s ambitious move into hosting, with AWS (Amazon Web Services). This business has not only provided hyper-growth but also juicy margins. In fact, AWS has essentially been the fuel that has funded other parts of Amazon’s businesses. Keep in mind that despite the huge scale, the e-commerce segment has remained low margin.
As for Shopify, it is mostly focused on e-commerce. And yes, it remains low margin. For last year, the GAAP loss was $40 million, or 42 cents a share. This was actually in line with what the company reported in 2016. All in all, SHOP is not realizing much operating leverage as revenues continue to spike.
In the meantime, the competitive environment remains intense. Some of Shopify’s rivals include Weebly, SquareSpace, Wix.Com Ltd (NASDAQ:WIX) and Godaddy Inc (NYSE:GDDY). They all have strong platforms and access to large amounts of financial resources.
Something else: The Shopify Capital segment poses risks. Let’s face it, small businesses can easily run into troubles, which may lead to defaults. As seen with other online lenders, such as LendingClub Corp (NYSE:LC) and On Deck Capital Inc (NYSE:ONDK), the business can be difficult.
But SHOP appears to not be concerned. In the latest quarter, the company more than doubled its merchant cash advances to $39.7 million.
Bottom Line on Shopify Stock
SHOP stock is certainly at nose-bleed levels, as the shares trade at about 24 times revenues. To put this into context, GDDY is at 4.8X, and WIX sports a multiple 9X.
Even Wall Street analysts are a bit antsy. Note that the average price target on SHOP stock is $144.46, which actually implies 3% downside.
Given this, it should be no surprise that the company’s management has recently issued 4.8 million shares of new stock, raising a cool $657.6 million. Might as well strike while things are hot, right?
Definitely. But for investors now looking at SHOP stock, it might be prudent to wait for a better price.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.