Shopify (NASDAQ:SHOP), the money-losing e-commerce software company, remains a stock on fire. As recently as the start of the Trump Administration, this was a $50 stock. Shopify stock opened today above $275 per share.
Investors are valuing a company with $1.07 billion in sales last year, albeit on a pace to do $1.4 billion in 2019, at $30 billion. That’s more than Square (NASDAQ:SQ), which had revenue of $3.3 billion last year and, unlike Shopify, is at least narrowing its losses.
I have been writing about this bubble for 18 months, ever since Citron Research warned about it. I have warned the bubble is going to pop and other Investorplace writers, like Vince Martin, have written similarly.
But it keeps going up.
Pros Are Warning Against Shopify Stock Too
Now even financial pros who make a living moving money (rather than writing about it) are warning people away. Guggenheim’s Ken Wong says his bullish case is already priced into Shopify stock and has dropped his rating to neutral. Morgan Stanley (NYSE:MS) analyst Brian Essex has dropped his rating to underweight, noting that less than half of Shopify’s revenue comes from subscriptions and SHOP doesn’t deserve the multiple it’s getting.
The Bulls Are Winning
The bulls are ignoring the warning signs, but, more importantly, they’re still winning. Shopify shares are up over 80% just in 2019. There are 28 analysts following the stock and more than half still have it on their buy lists .
Bulls point to Shopify’s latest earnings release, delivered April 30, with its 50% revenue growth year-over-year. Subscription revenue, Essex’ concern, was up 40% at $140.5 million. Still not half the total but close.
Others pounding the table for the stock call it “built to scale,” allowing small businesses to grow without changing their infrastructure.
Other bulls point to Shopify Plus, a more-expensive version of the software now being used by packaged-goods companies and celebrities like quarterback Tom Brady.
Still other bulls point to the company’s “ecosystem,” specifically an app store that lets Shopify re-sell third-party modules and take a massive 20-30% cut of the revenue.
Take Your Money
It’s possible these bulls are right. Maybe the software is extremely well written and scalable. Maybe it can boost subscriptions with a higher-priced version. Maybe it can keep getting merchants to buy add-ons.
But the hype, and the valuation, has reached 1999 levels. Shopify has never turned an annual profit, and in fact its losses are widening, year by year. There are fewer than 100 million shares of stock outstanding, 6% of which were being shorted at the end of April. It wouldn’t take many people heading for the door to make it fall hard.
In order to justify its valuation Shopify needs to keep growing at its present 40% rate and (more important) turn a profit. Some analysts are betting that will happen as early as the current quarter, although the “earnings whisper” is for another 30 cent per share loss.
The Bottom Line on Shopify Stock
I was wrong on Shopify in 2017. I was wrong on Shopify in 2018.
That doesn’t mean I’m wrong on Shopify now.
If you’ve been in SHOP stock, you have a very fat gain, you’ve made me look foolish, but a profit isn’t a profit until you have it in your hands. Until then it’s just paper — or numbers on a screen. It is easy to fall in love with a stock, especially one that has made you a lot of money.
But no boom lasts forever and when it slows, this stock will bust. I don’t know how hard, but it’s overvalued right now.
Dana Blankenhorn is a financial and technology journalist. He is the author of he 2018 mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.