One of my favorite long-term growth stocks in the market is e-commerce solutions provider Shopify (NYSE:SHOP). I got bullish on SHOP stock in mid-to-late 2017, when it became obvious that decentralized, direct-to-consumer commerce was the future of retail, and that Shopify provided the building blocks for that future.
SHOP was a sub-$100 stock. In the intervening 18 months, I’ve reiterated my bull thesis time and time again, put Shopify in my high-growth, long-term trading group STARS, and all the while, SHOP stock has more than doubled.
But, even as a long-term bull, I think it may be time for the red-hot Shopify stock to take a breather here around $200.
Still a Long-Term Play
To be sure, this isn’t to say that Shopify isn’t a great long term investment anymore. On contrary, Shopify is still one of the market’s best multi-year investments, powered by some of the most robust secular growth tailwinds in the global economy. But, long-term gains don’t always equal near-term gains. Sometimes, even the market’s brightest stars get ahead of themselves, and need to cool off.
That’s exactly where I think we are with Shopify stock. The long-term growth outlook remains very healthy. The shares will head way higher in the long run. But, near-term upside in SHOP stock looks limited by three factors: increasing competition, slowing economic expansion, and a full valuation.
Near-Term Risks Are Mounting
SHOP stock has had a tough past few weeks, and not without reason.
- Facebook (NASDAQ:FB) launched Instagram Checkout, which some see as a threat to Shopify given that it could ultimately cut Shopify out of the equation in Instagram commerce.
- Square (NYSE:SQ) revamped its Square Online Store to be a more robust Shopify competitor. Shopify and Mailchimp terminated their partnership over data sharing disagreements.
- News broke that Microsoft (NASDAQ:MSFT) is getting into the e-commerce solutions game.
- Widely followed short seller Citron Research put out a bearish note on SHOP stock, calling for a $100 price tag within the next 12 months.
Add these up and the news flow related to Shopify has taken a sharp turn for the worse of late.
Broadly speaking, all these developments have one central theme: Shopify isn’t the only game in town. Everyone is starting to realize that decentralized, direct-to-consumer commerce is the future. Consequently, everyone is jumping into this space. Facebook’s next big move is commerce and selling things directly through their ecosystem. Square wants to get into e-commerce after dominating brick-and-mortar commerce for small to medium sized merchants. Microsoft sees the opportunity.
Amid all this rising competition, the global economy is slowing, and Shopify stock is trading at a rather rich 20 times trailing sales. So, in the near term, you have rising competition headwinds converging on a slowing economic expansion backdrop and a rich valuation. That combination ultimately implies sideways trading for the foreseeable future.
Long-Term Upside Remains Healthy
To be 100% clear, nothing about this near-term noise affects the long-term growth fundamentals underlying SHOP stock.
First, Instagram Checkout will serve as a complement to Shopify, and retailers/brands will have both, since not all sales transactions happen through Instagram (only a small portion do). Second, Square is miles behind Shopify in the e-commerce solutions game, and even if they do gain considerable market share, the decentralized, direct-to-consumer market is growing fast enough to accommodate multiple high-growth players. Third, losing Mailchimp isn’t exactly a big deal for Shopify. Fourth, see the Square point, and just sub in Microsoft. Fifth, Citron has been bearish before, and they were dead wrong last time.
In other words, none of the near-term negative developments have any long-term negative implications for SHOP stock. In the big picture, Shopify provides the building blocks for retailers and brands to establish an online storefront — which has become essential in today’s direct-to-consumer retail world — and they are the best in class at doing so. Of course, at scale, they won’t be the only ones providing these building blocks. But, a natural assumption is that given the company’s leadership position, experience, management, and track record, Shopify will stay on top of this industry for the foreseeable future.
Assuming so, given that Shopify’s gross merchandise value amounted to less than 1.5% of global e-retail sales last year, the runway for growth in Shopify remain tremendous. I maintain that this company has $10-plus earnings-per-share potential within the next several years, and that this potential creates a pathway for a $300-plus SHOP stock price in the long run.
Bottom Line on SHOP Stock
All in all, SHOP stock remains a long-term winning investment. But, even the best long-term winning investments run into near-term valuation friction from time to time, and that friction keeps shares stuck in neutral for a while. That’s where we are with Shopify stock today. As such, while long-term upside remains compelling, near-term upside is capped.
As of this writing, Luke Lango was long SHOP, FB, and SQ.