Shopify (NYSE:SHOP) stock has been red hot in 2019. The e-commerce solutions provider ‘s two earnings reports have been strong this year. Both reports featured revenue growth of about 50% and surprisingly high profits for such a rapidly growing company. Investors have cheered those results. In 2019, Shopify stock is up nearly 80%.
But that is nothing new for the Canadian technology giant. Over the past several years, Shopify has grown its merchant base and revenues by leaps and bounds, while its margins have consistently moved higher, and its big losses have turned into sizable profits. As a result, over the past three years, SHOP stock is up a whopping 900%.
Retailers are pivoting with increasing momentum to a direct, decentralized business model, and SHOP is the heart of this new model. This pivot is still in its early stages. As it continues to play out with even greater momentum over the next several years, Shopify’s merchant and revenue base will continue to expand dramatically, while its profits will move significantly higher. All in all, that should power Shopify stock to healthy long-term gains.
Having said that, all stocks – even long term winners – have their run-ins with volatility. Shopify stock hasn’t experienced much volatility all year long. It’s also up quite a bit, and trading at a mega-rich valuation. Consequently, it seems likely that this long term winner is due for some turbulence in the near-term.
Net net, this isn’t the time to buy SHOP stock if you’re a trader. But if you’re an investor, don’t stress about the near-term weakness of Shopify stock. Embrace it, and use it as an opportunity to accumulate SHOP stock for the long run.
Shopify Stock Is a Long-Term Winner
The long-term bull thesis on Shopify stock is quite simple, and it’s equally compelling.
Retailers’ new business model can be divided into two components: direct and decentralized.On the direct front, the internet has directly connected brands/sellers to customers/buyers, removing the need for a middle man. Consequently, brands/sellers are now selling directly to customers/buyers via direct channels, like online store fronts, social media apps, digital marketplaces, etc.
Meanwhile, decentralization refers to the proliferation of the internet and selling tools which has democratized the selling process, so that any seller can sell any item to any buyer through any channel. That change increases the volume of supply in the market, reduces overall prices, increases buyers’ convenience, and allows new sellers to make money. In other words, it produces optimal outcomes across the board, so direct retailers are becoming more decentralized than ever before.
SHOP is the heart of this direct decentralized retail model. In order for this model to work, smaller sellers have to be able to compete with larger sellers. Shopify gives smaller sellers the tools to do just that.
More than that, these tools are working. Over the past several years, not only has SHOP’s gross merchandise value growth been huge, but its GMV has also significantly outpaced its merchant growth, meaning its GMV per merchant is growing, too. That means sellers are increasingly becoming more and more successful because of Shopify’s tools.
Thus far, SHOP and Shopify stock are only scratching the surface of their long-term potential. In 2018, SHOP’s GMV was about $40 billion. Last year. the value of global e-retail sales was just south of $3 trillion. Thus, Shopify’s GMV represented just over 1% of total e-retail sales. That’s tiny. At peak levels, its share of the global market could march towards 5%-10%, meaning that its days of 20%-plus revenue growth are just beginning.
Overall, then, Shopify is in the first inning of a long-term, non-cyclical growth narrative that will ultimately power SHOP stock significantly higher.
Shopify Stock Is Overdue for Near-Term Turbulence
Every stock – even the strongest ones – has run-ins with volatility. The problem with SHOP stock is that it is long overdue for its run-in with volatility.
The innate nature of high-flying growth stocks like SHOP is that they are volatile. They go up a great deal, and they go down a great deal. Shopify stock is historically no exception.
In 2018, Shopify stock had four declines of 20%-plus. In 2017, SHOP stock had four 10%-plus selloffs. But, in 2019, the stock hasn’t had a single 20% correction yet. Nor has it had a single 10% correction. Instead, in 2019, the biggest correction in the stock has been 6%.
Thus, history says that SHOP stock is due for some turbulence soon, and that such turbulence will likely chop off 10% or more from the stock.
Further, the stock is up nearly 80% year-to-date, has run way above its moving averages, is in overbought territory according to the Relative Strength Index, and is trading near an all-time high. SHOP’s competition is also ramping, and its growth could slow against the backdrop of elevated competition. If its growth does slow in the back half of the year, then SHOP stock could be due for a sizable correction.
All in all, while Shopify stock will be a big winner in the long run, the stock needs to take a breather now.
The Bottom Line on SHOP Stock
Shopify stock is one of the market’s best long-term investments. But, the stock has come very far, very fast in 2019, and needs to take a breather before resuming its longer term march higher.
As of this writing, Luke Lango was long SHOP.