3 Reasons to Sell Shopify Stock (Again)

Shopify stock - 3 Reasons to Sell Shopify Stock (Again)

Source: Shopify via Flickr

I’ve been a long-term bull on Shopify (NYSE:SHOP) for some time now. Even as Shopify stock has moved higher and higher, I’ve generally supported its attractive story. Shopify’s base of small business customers and its profit potential outweigh what have generally been the high multiples of SHOP stock.

But I turned cautious on Shopify stock back in August, citing three reasons why investors should sell the stock. The Shopify stock price promptly moved higher, but it has since pulled back to roughly the same level as when I wrote my column. And with SHOP stock back near $130, I again see good reasons to step to the sidelines here.

Again, the long-term story is attractive. But in this market, at this moment, I’d be careful about putting too much, if any, capital behind that story.

The Amazon Threat to Shopify Stock

Late last month, Shopify’s CEO admitted that Amazon.com (NASDAQ:AMZN) was taking aim at its business.

On this site last week, James Brumley made the case that Amazon wasn’t a huge threat to Shopify stock. And he made several good points. Amazon is a competitor of many of the small businesses it would seek to recruit for its new Storefront offering. A previous, similar Amazon project, Webstore, was shut down in 2015. And while investors are always wary of competition from Amazon, the fact remains that the company loses seemingly as often as it wins. Brumley pointed out that Etsy (NASDAQ:ETSY) was able to stave off Amazon; investors could also add industrial distributor W.W. Grainger (NYSE:GWW) and Netflix (NASDAQ:NFLX), among others, to the list.

But from a short-term standpoint, looming competition from Amazon could threaten SHOP stock. Over the longer term, Amazon would not have to take much share to change Shopify’s fundamentals. The reason SHOP stock trades at about 16 times the company’s trailing revenue is because SHOP’s incremental margins from new customers and upsells are enormous. If Amazon can steal a bit of SHOP’s revenue, the Shopify story doesn’t look quite as attractive.

The Market Looks Nervous

Broad market indices don’t show much weakness in the U.S. stock market. The S&P 500 is off about 3% from its September highs.

But there has been a reasonably big selloff lately of stocks that are not blue chips, along with a clear “risk-off” trade. The Russell 2000 is down 6%+ in less than three weeks. SHOP stock has pulled back over 20%; Square (NYSE:SQ), another high-growth, high-valuation small business play, has done about the same.

The market has become much more nervous. Whether it’s rising interest rates, trade fears, or just investors taking profits, the “everything moves higher” trend seen since late 2016 is starting to fade. And trading at 16 times its trailing revenue and 215 times its forward EPS, SHOP’s multiples have more room to decline.

Shopify’s Earnings And SHOP Stock

For both those reasons, I’d be cautious about owning Shopify stock here, particularly heading into its third-quarter earnings which should be reported later this month. Shopify’s earnings history is impressive; the company hasn’t missed any consensus estimates since it went public in 2015. That’s one reason the Shopify stock price has soared.

But at this point, an earnings beat won’t necessarily translate into gains for SHOP stock. Indeed, the stock sold off rather sharply into – and coming out of –  its Q2 report in late July, despite numbers that came in nicely ahead of consensus estimates.

I’d be worried about history repeating itself on that front, given the risk posed by Amazon and the market’s unease at the moment.

But any meaningful decline of the Shopify stock price could prove to be an opportunity. Again, longer-term, I like the company’s outlook. Small businesses should do well amid millennials’ demands for more unique (and less “corporate”) items.

Shopify even has some exposure to Canadian marijuana companies, which are setting up on the platform. I’d like to own Shopify stock at some point; I just don’t want to own it right now, at this price.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/3-reasons-sell-shopify-stock-again/.

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