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Now Would Be a Good Time to Sell Shopify Stock

If you thought the valuation in SHOP stock was nuts before, it’s downright comical today

I suppose every analyst has that one company that they can’t seem to get right. For me, that’s Shopify (NYSE:SHOP). I haven’t found Shopify stock convincing because I don’t really care for its financial performance. Nevertheless, many investors could care less about what I think, and with SHOP, they’re absolutely right.

Now Would Be a Good Time to Sell Shopify Stock

Last year, in May, I declared that SHOP stock was carrying a “ridiculous premium.” Sure, the company was growing, but the rate wasn’t really impressive considering the small revenue base. Plus, Shopify is a consistent money-loser, with net-income losses widening each year.

As early-bird speculators in Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) demonstrated, sometimes all you need is a good narrative. Then again, these two names started to justify their wild valuations. I can’t say the same for Shopify stock.

However, a quick look at the charts confirms the opportunity cost of my bearishness. Yes, SHOP stock did generally trade lower in the second half of 2018. However, this year, shares have launched into low-earth orbit, nearly doubling in price since the January opener. Should I now change my tune on the e-commerce marketplace?

Admittedly, I understand the speculative appeal. Anyone with functioning eyes can see that we’re rapidly headed toward a fully digitalized ecosystem. From the average person’s perspective, the most conspicuous change is in retail.

Today, we no longer have to wait in line at Walmart (NYSE:WMT), Target (NYSE:TGT) or Best Buy (NYSE:BBY) to score the latest gadget or gizmo. Instead, we can shop online through Amazon and have the products delivered to us relatively cheaply.

In addition, digitalization has made it possible for the small fry to market their products directly to the public. That’s the appeal and pitfall of SHOP stock.

Shopify Stock Has a Scalability Problem

Theoretically, Shopify stock should be one of the most scalable investments ever. The underlying company provides an e-commerce platform for merchants. As individual merchants become successful, the rising tide should lift all boats.

Shopify can invest more funds into its platform, addressing the needs of both its small and large clients. And it shouldn’t take that much effort and resources to scale up their business: ultimately, we’re talking about an online platform, not a physical one.

Unfortunately, theory doesn’t match reality for SHOP stock. Certainly, Shopify enjoys the presence of many top brands. However, the overwhelming majority of merchants are mom-and-pop shops that no one has heard of. Worse yet, these names are such small players that most will likely fail very quickly.

Critics have long argued that you need to take the subscription growth in Shopify stock with a grain of salt. The online marketplace is flooded with low-quality merchants, attracting the attention of short-sellers. While this bearishness hasn’t played out in the markets, the point remains: Shopify attracts losing businesses.

This is the reason why management is reluctant to release their churn rate. If they did, we could see a disturbing volume of failures.

By the way, the churn rate is another oft-repeated criticism. Perhaps now, people are sick and tired of hearing about it. Nevertheless, this metric is incredibly critical to put the company’s “success” into context.

For instance, in the last Q1 earnings report for Shopify stock, the company reported a 50% year-over-year bump in revenue. Great. But most of the company’s revenue comes from merchant solutions or payments processing. In other words, they’re selling hopes and dreams to businesses that statistically don’t have a chance in the warm place.

You see why churn is so important?

Easy Call on SHOP Stock

Had Shopify stock gone rangebound this year, I’d have some trouble discussing this name. Although some of the core fundamentals are incredibly risky, the idea of this firm admittedly attracts the markets. At the end of the day, that’s really all that matters.

However, with shares having gone bonkers in 2019, this is an easy call. I’m not even going to bother with weasely statements to hedge my reputation. You should simply sell or avoid SHOP stock.

Shopify represents a business that is supposed to scale up. Instead, they’re treading water with the same low-profile, low-quality merchants they’ve had since day one. This company reminds me of a multi-level marketer deliberately seeking out dumb people to victimize. The problem with this strategy is that you eventually run out of dumb people.

Shopify stock appears brilliantly suited for the 21st-century economy. But unless they shore up the overall quality of merchants, I can’t see them moving far. At the very least, they don’t deserve this crazy valuation.

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

Article printed from InvestorPlace Media, https://investorplace.com/2019/05/now-a-good-time-to-sell-shopify-stock/.

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