Shopify Inc Stock Isn’t Just Too Pricey, It Also Still Is Losing Money

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Shopify stock - Shopify Inc Stock Isn’t Just Too Pricey, It Also Still Is Losing Money

Source: Shopify via Flickr

Shopify Inc (NYSE:SHOP) is one of the revelations of this year. Against its January opener, Shopify stock has rocketed to a meteoric 45% lead. Since its initial public offering in May 2015, shareholders profited a blistering 765% return. Obviously, no one is going to deny these numbers, but the question is, are they sustainable?

As much as I love ecommerce and all things digital (I am a blockchain fanatic, after all!) I also love common sense. Regarding Shopify, no company can keep up this dramatic pace. Recall that mighty Amazon.com, Inc. (NASDAQ:AMZN) suffered frustrating consolidation immediately after posting its first four-digit share price.

And just like Amazon, Shopify has encountered a nagging criticism: negative earnings. How can Shopify stock justify such a rich premium when it continues to widen losses? And by rich premium, we’re talking a forward price-earnings ratio exceeding 833-times.

That said, we’re living in what Forbes contributor Jon Markman labels the “Amazon era.” Many investors today don’t rely on fundamentals to base their decisions, if they even look at them at all. It’s enough to have a great story. Even better if it’s feasible.

The hoopla surrounding Snap Inc (NYSE:SNAP) prior to its IPO presents a fine example. Early-bird investors bought in with the idea that social media is king.

Questionable financials? Hogwash. Facebook, Inc. (NASDAQ:FB) and Twitter Inc (NYSE:TWTR) imposing fierce competition? Snap is the platform of choice for the next generation. It was not for old geezers using Facebook.

Generally speaking, the ignoring fundamentals approach has baffled market bears. Shopify stock, despite taking a sizable decline near March-end, picked itself back up. Admittedly, shares look robust, trending inside a bullish trend channel.

But is now the time to jump onboard the SHOP bandwagon?

The Numbers Still Matter for Shopify

Judging by the enormous sentiment towards Shopify, I understand if traders have FOMO (fear of missing out), but isn’t this heightened emotional state the perfect time to reassess what you’re buying?

Yes, the revenue growth is phenomenal. In the past four years, top-line sales growth averages a whopping 86%. You’re just not going to find that in major companies.

But that’s also the point, isn’t it? Smaller firms grow faster, in large part due to the novelty effect and also the law of small numbers. Doubling sales from $1 million is much different than the same percentage boost from $1 billion.

What I fear is that Shopify might be losing steam when it really should be pushing higher. The 86% average sales growth washes away the fact that in 2017, sales increased by 73%. And since 2014, revenue growth has consistently declined. Plus, in the most recent quarter, revenue increased 68% year-over-year.

Small sample size? Definitely. But Shopify is dealing with relatively small numbers. So I’m not going to give Shopify stock a pass here.

Investors who are considering getting in now should also peruse Shopify’s institutional ownership, which currently stands at nearly 66%. Though high institutional ownership isn’t an immediate red flag, it indicates that if holding fund managers get freaked out, shares could go tumbling.

That’s a significant risk for a young investment like SHOP stock. Fund managers are human. They also have their own performance metrics to meet. Thus, you might believe in the Shopify storyline, and fund managers do, to a point. If something happens, the managers will protect their clients and their reputation first.

Also keep in mind that Shopify stock dropped this year in between two outstanding earnings performances.

Shopify Stock Is for Fire-breathers

Which is to say this: if you’re going to buy Shopify stock, expect ahead of time that on certain days, you’ll get burned. And really, if you’re going to engage this company, I’d be completely neutral. In other words, you should just as easily be ready to buy as you are to sell.

The fact is, you’re buying into a company that has declining sales and widening losses. If you bought a few years ago, that reality had obviously yet to settle in. The company’s ambiguity created this massive boost in SHOP stock’s valuation.

But today, that ambiguity surrounding Shopify is gone. As its first quarter 2018 results demonstrated, the company’s impressiveness is becoming less so. Is that worth 800-times forward earnings? I doubt it.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/shopify-stock-losing-money/.

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