Undoubtedly, Shopify (NYSE:SHOP) is the gift that keeps on giving. Despite serious reservations on both the fundamental and technical ends, the shares continues to defy gravity, with SHOP stock up 160% since the markets’ December nadir.
I’m honestly at a loss for words. The enthusiasm surrounding the e-commerce specialist has reached magnitudes not seen since the last cryptocurrency run.
I must admit that I take this matter personally. Although I don’t have any skin in the game, I recommended in mid May that InvestorPlace readers sell their Shopify stock. Since then, shares have gained slightly over 22%. That’s just bonkers.
Although I acknowledged Shopify’s several key attributes — including the ability for small-business owners to close the gap with their larger counterparts — I brought in critical context. Certainly, SHOP stock has benefited substantially from the underlying company’s meteoric growth rate. However, that growth comes from the low-hanging fruit of poor-quality businesses.
I argued that Shopify doesn’t want to disclose its churn rate because it would cloud the sustainability of that growth. Of course, the problem for me is that none of my points mattered. Shopify stock charges forward. To be sure, it’s not the first time that I’ve been wrong about this firebrand.
Some strong fundamental news suggests that we’ll soon see another leg up in SHOP stock. Having “conquered” the business-to-consumer (B2C) world, SHOP has eyes set on the business-to-business (B2B) model.
The shifting priority makes perfect sense. Although B2C attracts headlines, thanks to companies like Amazon (NASDAQ:AMZN), it’s a saturated and mature segment. On the other hand, B2B features untapped potential. We’re talking about a U.S. market worth $1 trillion, which would be a game changer for a company that has barely cracked $1 billion in annual sales.
Flaws Starting to Catch Up with SHOP stock
Given my lack of success calling Shopify stock, I’m not exactly looking forward to putting myself out there again. But despite what must sound like a broken record at this point, I’m still hesitant on the company.
First, SHOP is in the retail business. While it has created a platform that allows small businesses to flourish, most of them are probably not successful there. Otherwise, why hide the churn?
Further, Shopify isn’t really unique nor does it have a moat. The power of SHOP stock lies in the company’s brand name. But having a solid brand doesn’t protect you from disruption. As a result, Shopify must demonstrate financial viability. The problem of course is that net-income losses are widening.
Second, the growth picture for SHOP stock is mathematically showing signs of weakness. For example, in 2015 and 2016, Shopify’s year-over-year quarterly revenue growth averaged 93%. Over the last eight quarters, that vaunted growth slowed to 64%. Sure, it’s still lofty, but it’s a marked decline from prior highs.
More critically, that rate has consistently eroded while Shopify stock collected investor sentiment and dollars. Based on this trend, quarterly revenues will soon peak, and eventually flatline.
Using sales data from the first quarter of 2015, I extrapolated revenue out to Q4 2020. The forecast isn’t pretty, calling for a 27.4% growth rate. Nominally, revenue would be just under $622 million.
Of course, data extrapolation isn’t a perfect means to forecast future revenues. The results come from pure math. Obviously, they don’t account for variables such as product launches, management changes, and political factors.
At the same time, SHOP has had ample opportunities to change their revenue-growth curve. But quarter after quarter, year after year, they keep sliding. The extrapolation merely reflects this established, negative trend.
B2B Shift a Possible Sign of Desperation
I’m sure management understands this. They have far better data, as well as a superior grasp on their business environment. Yet I’d bet that the result is still roughly the same: declining growth leading to peaking sales.
Therefore, I don’t view the B2B transition as a positive, but rather, a desperation move. Eventually, investors will want to see substantive results from SHOP stock. Currently, Shopify isn’t getting those results from their B2C business, and they’re unlikely to do so.
But transitioning to B2B? I doubt that lightning strikes twice. Along with Amazon, SHOP must go up against powerhouse Alphabet (NASDAQ:GOOGL). Even Salesforce (NYSE:CRM) and Adobe (NASDAQ:ADBE) are getting into the game.
This immediately tells me that B2B is whole different animal. Success requires not just a brand but substance to back it up. SHOP would essentially take a knife into a machine-gun fight. And that’s why I’m cautious on Shopify stock, even if I was wrong before.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.