As It Begins Showing Weakness, Steer Clear of Shopify Stock

Shopify (NYSE:SHOP) surged to record highs on Tuesday after an analyst upgraded Shopify stock. The ecommerce platform has defied predictions and rose to record highs amid optimism about the future of e-commerce.

As It Begins Showing Weakness, Get Well Away from Shopify Stock
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However, valuations concerns with SHOP have arisen, and the equity gave back its Tuesday gains during Wednesday’s trading sessions.

Although nobody can tell whether Shopify will stop moving higher anytime soon, investors take on high levels of risk by buying at current levels.

Shopify continues to receive upgrades

SHOP stock moved higher on Tuesday as Rosenblatt raised its price target from $410 to $481 per share. Analyst Mark Zgutowicz predicted that revenue from the Shopify Fulfillment Network will surge from $300 million in 2021 to over $6 billion by 2025. Zgutowicz also raised revenue estimates for future years.

Yes, investors have good reason to believe in the Shopify business model. I have often contrasted it with Amazon (NASDAQ:AMZN) as this “anti-Amazon” allows small businesses to open their own ecommerce store without any involvement from the ecommerce giant.

It also enables stores that would otherwise have only a local reach to find customers throughout the world. Moreover, it can bring innovative products to market without having to rely on larger players.

But nobody should confuse Shopify, the company, with Shopify stock. It has risen by about 190% since the beginning of the year, and 26% since Aug. 1, when the company announced its massive earnings beat. This stands in stark contrast to what I had forecasted back in June and on many other occasions.

Yet, in spite of charges that it is a bubble setting itself up for a massive swoon, it continues to charge higher. The stock selloff last fall temporarily slowed SHOP down. Trade wars, inverted yield curves, analysts downgrades, and lengthy economic expansions have stopped many equities in their tracks. Not Shopify. Both myself and many of my colleagues have had to eat a lot of crow on SHOP stock.

Cracks Are Starting to Show

The question for investors is, does this justify a forward price-to-earnings (PE) ratio of 416? I still emphatically insist “no.” However, as we’ve proven over these last few months, investors may continue to bid Shopify stock higher.

In fairness, Shopify stock deserves a high valuation. The Ottawa, Ontario-based firm plays a significant role in driving the future of ecommerce. Consequently, Wall Street forecasts profit growth of 63.2% this year and 56.5% in fiscal 2020. I consider that phenomenal growth, just not 416 times forward earnings phenomenal.

However, as we all know, SHOP stock has traded mostly independent of the numbers. Still, even if the herd continues to ignore issues, I think the nature of this stock demands a reminder of those challenges.

Shopify does not have a monopoly on small-business ecommerce sites. In addition to smaller names such as WooCommerce, Adobe (NASDAQ:ADBE), Microsoft (NASDAQ:MSFT), and Facebook (NASDAQ:FB) all compete in this space. Moreover, if a recession truly is coming, many of the small shops on which Shopify depends will shutter their stores.

Clearly, few now seem to care. They could go on not caring for some time to come. However, as Warren Buffett’s mentor Benjamin Graham said, the stock market is a weighing machine in the long run. Someday, it will weigh and weigh big.

The Bottom Line on Shopify stock

Although Shopify stock continues to defy predictions, traders face a high level of risk buying at today’s prices. Admittedly, most have stopped caring about SHOP’s stratospheric valuation.

The upgrade from Rosenblatt shows price targets will follow suit as long as the stock keeps moving higher. Analysts such as myself have grown tired of guessing wrong on Shopify.

Given the profit growth, I think SHOP stock will carry a high valuation for years to come. However, as soon as traders begin to care about PE ratios, it will matter and matter a lot. I would advise the risk-tolerant to go short, and everyone else to just go away when that time comes.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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