4 Key Charts Say The Clock Is Now Ticking For Shopify Stock

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With nothing more than a cursory look, Shopify (NYSE:SHOP) looks like a reasonable enough speculation. Revenue is rising, Wall Street is cheering it, and the volatility SHOP stock is dishing out isn’t unusual for a company presumably en route to actual GAAP profits.

Take a closer, more critical look at Shopify, though, and suddenly SHOP stock isn’t all that compelling.

While the company’s strategy is on-target given the current state of e-commerce, the numbers simply don’t add up. The trajectory is off target, and something significant is going to have to change for the better — and soon — if Shopify stock is to break out of its current funk and start moving in a bullish direction. First and foremost, the company’s got to stop relying on funds raised through secondary offerings.

Shopiwhat?

Shopify, for the unfamiliar, doesn’t directly compete with online-selling powerhouses like Amazon.com (NASDAQ:AMZN) or eBay (NASDAQ:EBAY). Indirectly, though, it does compete with those giants as it small-scale organizations that can’t find the right foothold with other e-commerce platforms to set up their own shops using Shopify’s tools.

It’s an idea whose time has certainly come.

It takes a large degree of scale to thrive on Amazon.com; sellers are often competing with the host company itself. And, eBay arguably makes it all too easy for thousands of individual yard-sale-scale sellers to compete with businesses that are looking for a full-blown, business-oriented platform. Shopify serves a middle market that’s largely been disenfranchised by other options.

It’s not clear that such a business model can be profitable, however, even if Shopify continues to grow.

Pictures Tell The Story

Yes, the company is profitable on an operational basis. That’s not a terribly high hurdle anymore though, often achievable with some clever accounting. A far more telling measure of long-term viability is, of course, GAAP (actual) profitability and free cash flow. Both remain in the red for Shopify.


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And, given analyst estimates, both will likely remain in the red for the foreseeable future. Not even the usually-strong Q4 looks to be enough to drive full-year profitability yet.

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“But that’s just the nature of startups… initial losses that will in time swing to GAAP profits and positive cash flow (and losses that can be used to offset the tax liability of future profits)?”

Maybe. But take a closer look at the trajectory of Shopify’s key accounting figures. The more that revenue grows, the more unprofitable the company becomes — at least on a GAAP basis. Free cash flow might be making progress, but it’s difficult to say so with any conviction just yet.

Now factor in the added detail that since mid-2015, the number of shares of Shopify stock issued and outstanding has grown from 53 million to more than 106 million, thanks to another round of fundraising completed just a week ago. Also note that analyst estimates include more secondary sales going forward.


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Again, selling more and more shares via a secondary offering is not only not terribly unusual, it’s also often necessary for a young company. Somehow, though, for Shopify it has become a drug the company can’t live without. With roughly a couple of billion dollars raised through secondary offerings just since going public in 2015, the company’s got little in the way of self-sustaining staying power to show for it. At this point in its life, one would expect at least a bit more solvency.

Investors Growing Restless, Exacerbating the Risk

Maybe that’s all on the verge of changing. Perhaps Shopify is at a tipping point where it’s finally reached a scale that expands its profit margins and starts to work towards positive free cash flow and GAAP profits.

Most investors are starting to entertain doubts, however, given the current condition of SHOP stock.

There was a time not too long ago when Shopify could do no wrong. The story was scintillating and SHOP stock was rallying. As time has marched on — and as the company hasn’t produce enough fiscal progress to fully justify repeated fundraisers — investors have turned on Shopify. Shares have been trending lower since the middle of this year, and the perception of secondary offerings has flipped from being seen as growth catalysts to being seen as just more dilution. SHOP stock fell 13% in response to the most recent stock sale.

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Shares have bounced back a bit in the meantime, but even before the fundraiser was revealed, investors were becoming more and more cautious. The stock is now below all of its key moving average lines. Worse, for the first time since 2016, all of those moving average lines are pointed lower.

Something’s changed. Most plausibly, investor patience is simply wearing thin, posing a risk to future fundraising plans. The amount of cash raised through secondary offerings is entirely a function of SHOP stock’s price at that time.

Bottom Line for Shopify Stock

As always, never say never. Shopify may be on the cusp of turning a fiscal corner and discontinuing future fundraising. Or, if not that, at least a glimmer of hope will continue making SHOP stock a highly marketable asset for future fundraising sales.

To be honest, though, there’s little evidence of that cusp on the horizon. Something dramatic would have to change in the company’s operation, and the sooner, the better.

Management’s still got some time before the use of SHOP stock as currency will no longer be effective. If Shopify can’t show shareholders something tangible within two to three quarters though, the company may find investors aren’t so willing to continue plowing money into a business that doesn’t appear to be on a path to permanent viability. That could quickly put start a death spiral for Shopify stock.

Be cautious, and keep an eye on these details that aren’t being discussed all that often.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/4-key-charts-say-the-clock-is-now-ticking-for-shopify-stock/.

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