The Premium for Shopify Stock Is No Longer Justified

SHOP stock - The Premium for Shopify Stock Is No Longer Justified

Source: Shopify via Flickr

If it’s true that there’s no such thing as bad publicity, Shopify (NYSE:SHOP) and SHOP stock enjoy enviable PR riches. For instance, the mainstream media is buzzing about celebrity Kylie Jenner, who is on the verge of becoming the youngest-ever self-made billionaire. But it’s the Shopify platform that should take much of the credit.

Jenner’s company, Kylie Cosmetics, stunned the beauty industry with massive sales to adoring fans. Kylie Cosmetics is now worth approximately $800 million, but that’s not the key issue. Rather, it’s the timing and the platform. Jenner accomplished this incredible feat in less than two years. Moreover, as a true Generation-Z member, she’s doing it all online.

Specifically, she utilizes Shopify to handle the day-to-day administrative tasks, and to host her website. Jenner is in good company. According to CNBC, major corporations such as Tesla (NASDAQ:TSLA), Nestle (OTCMKTS:NSRGY), and Anheuser Busch Inbev NV (NYSE:BUD) all use Shopify in varying degrees.

Such powerful, relevant clientele should easily boost SHOP … and of course, it has. On a year-to-date basis, shares are up over 43%. This follows a banner year in 2017, where Shopify stock returned over 133%. Over its short life, the e-commerce site has gained over 414%.

But every good story must come to an end, or at least take a respite. Both investors and onlookers saw some worrying signs recently when SHOP stock failed to decisively break the $170 barrier.

In the second-half of June, Shopify stock attempted to break past $175, having only touched it on an intra-day basis. Shares quickly collapsed, only to mount another challenge almost exactly a month later. Again, the bulls failed to establish a support line.

Since July 25, Shopify is down 16%. Not only that, additional pain is possible.

SHOP Stock Is losing Fundamental Momentum

Undoubtedly, SHOP stock benefited from the hype machine. I don’t view this as a negative. The best opportunities are the ones that the masses don’t yet recognize.

Clearly, I didn’t recognize the opportunity before SHOP ballooned into what it is today. I was focused on the company’s fundamentals, which didn’t look all that bright.

Still, many great organizations have ridden the markets’ hype train before justifying their valuations with solid business developments. Both Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) defied early doubters before producing breathtaking equity gains and financial performances.

As the new kid on the block with an exciting, relevant business structure, Shopify stock exceeded expectations. But now that investors are taking a second look due to its recent corrections, SHOP appears well overextended.

I say that because the company is losing fundamental momentum. Notice that from 2015 onwards, Shopify’s annual revenue growth has consistently declined. In 2015, the e-commerce platform generated $205.2 million, up 95% from the prior year. In 2016, Shopify rang up $389.3 million, up 90%. Last year saw $673.3 million, or a 73% increase.

Quarterly reports also show a similar magnitude decline. In the first quarter 2017, Shopify produced $127.4 million in top-line sales, or 75% year-over-year growth. In the last read, Q2 2018, the company generated nearly $245 million, but only 61.5% YOY growth.

Don’t get me wrong: these are enviable growth metrics. But in the nominal context, I must say I find SHOP stock worrying. In the grand scheme of things, Shopify is still young. Therefore, its growth rate should explode higher due to the law of small numbers.

Yet the evidence suggests that Shopify stock is peaking as a sub-$1 billion company, which is fine … but I don’t want to pay over 833-times forward earnings for the privilege.

Shopify Stock Has Jumped Ahead of Itself

The scary part about Shopify stock is that the company continues to beat the earnings print. In its most recent Q2 report, SHOP exceeded consensus targets for both the top and bottom line.

But rather than a celebration, SHOP stock was first volatile, than muted. Right now, shares appear stuck in a frustrating sideways consolidation. The longer it stays this way, the more I’m concerned the bears will eat up Shopify.

While management has delivered some impressive user-growth statistics, the overall business is losing money. In Q2, Shopify widened net-income losses to $24 million, a significant disappointment from the year-ago quarter’s loss of $14 million.

From what I can deduce, SHOP stock depends on its high-profile clients to generate substantive growth. But for every Kylie Jenner, there’s a thousand nameless accounts just making up the numbers.

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

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC