I’ll freely admit that I’ve been wrong about Shopify (NYSE:SHOP) because claiming otherwise is just ludicrous. Shopify stock easily qualifies as one of the top investments of this year. Since January’s opening price, shares have skyrocketed nearly 140%. And it’s not just technical sentiment driving this ecommerce platform: there’s fundamental justification here.
Primarily, this comes in the form of a massive beat for its second quarter of 2019 earnings report. And “massive beat” doesn’t really do this performance justice. Against a consensus per-share profitability target of three cents, the actual earnings per share came in at 14 cents.
Moreover, the company’s revenue haul impressed market observers. Prior to Q2, the consensus called for top-line sales of $350 million. Instead, SHOP rang up $362 million, or a 3.4% positive surprise. To no one’s surprise, Shopify stock surged more than 7% on the financial disclosure.
And management didn’t stop there, raising expectations for both Q3 and full-year revenue. The company guided a range between $377 million to $382 million for Q3, and $1.51 billion to $1.53 billion for fiscal 2019. Previously, Wall Street’s forecasts were $374 million, and a range between $1.48 billion to $1.5 billion, respectively.
Indeed, SHOP stock sets a fresh benchmark for what it means to be a growth investment. In the year-ago quarter, EPS was only 2 cents. And revenue was down at $245 million, or a gap of $117 million.
Add in their $1 billion investment toward a distribution network and its international expansion plans, and you have even more compelling reasons to consider Shopify stock.
But with so much enthusiasm baked into shares, is now the right time to gamble on Shopify stock?
SHOP Stock Is Telegraphing a Correction
Although I don’t have any skin in this game, at this juncture, I can provide an objective assessment: it’s likely in your best interest to trim your stake.
First, the post-Q2 movement in SHOP stock has been less impressive. In fact, as of the time of this writing, shares have almost lost their Q2 bump. If Wall Street truly believes in Shopify’s growth narrative, they’re currently doing a poor job demonstrating it.
Second, the finer print from the last earnings report isn’t as impressive as many analysts have claimed. For instance, folks are going crazy over the fact that year-over-year sales growth is nearly 48%. But in Q2 2018, the YOY growth rate was a much more robust 61.5%.
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In fact, ever since Q4 2015, the YOY growth rate has steadily and consecutively declined. Mathematically, I don’t find this trend that surprising. Although speculators love this stock, the reality is that on a nominal basis, we’re still dealing with relatively small numbers. Therefore, as the company’s nominal sales haul increases, its growth rate should diminish.
Consider that in 2016, the YOY quarterly sales growth rate averaged 90.5%. In 2017, this metric slipped to 73.3%. The following year, it dropped again to 60.4%. In the first half of 2019, we’re looking at 49%.
These are dramatic declines, and current trends suggest these declines will worsen. Thus, I anticipate that many growth investors will pocket their profits in SHOP stock before moving onto something “growthier.”
And please don’t get me wrong: I’m not suggesting that Shopify stock is a bad investment. I already made that mistake before and I’m not going to repeat it. That said, let’s be practical: why hold SHOP stock if others will probably dump it?
Low-Hanging Fruit Is Gone for Shopify Stock
One of the reasons why SHOP stock was initially so successful was that the underlying company carved out a niche. Its platform gave small businesses a chance to compete with the big boys.
Now, Shopify stock must also compete with the apex predators in the broader e-commerce business. In order to move to the next level, management must take greater risks for incrementally lower returns. Put another way, the low-hanging fruit is gone. They’re batting in the big leagues.
Unfortunately, that’s problematic for a relatively small outfit like Shopify. For instance, their distribution network is designed to compete with Amazon (NASDAQ:AMZN). But Amazon is nearly a trillion-dollar company. No one is going to disrupt this beast.
Additionally, Facebook (NASDAQ:FB) will continue to invest in its Instagram shopping app. Facebook could also one day become a trillion-dollar firm. What I’m saying here is that these giants have the resources to tinker and experiment. Once they find the right formula, they could put a hurting on SHOP stock.
Of course, we’re talking about events further down the road. In the meantime, Shopify stock looks very stretched. From just a practical standpoint, it again doesn’t hurt to consider trimming your exposure.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
