The gains in Shopify (NYSE:SHOP) stock continue. SHOP stock now has risen 176% in 2019 alone. It has more than tripled from December lows.
Shopify stock has had a truly staggering run. The company has added nearly $25 billion in market value in seven and a half months. And all the while, observers — myself included — have argued that SHOP stock is a bubble, or at the very least significantly overvalued.
Yet Shopify stock marches higher regardless, climbing the proverbial “wall of worry.” And as I have written of late, the stock could keep going. Fulfillment plans offer another reason for bulls to see even greater profits down the line. More broadly, investors have shown a willingness to pay up for growth.
I still believe Shopify is overvalued. I called it out last month as one of 10 stocks set to crash at some point. The question after another blowout earnings report is when that point might come — and what will be the catalyst.
Could a Market Decline Hit SHOP Stock?
The most obvious catalyst would seem to be a broad market decline. After all, when markets struggled in the fourth quarter of 2018, SHOP stock did as well.
That said, SHOP didn’t perform that badly. It declined 16% in the fourth quarter. But the NASDAQ Composite fell 18%. Square (NYSE:SQ), another high-growth, high-priced, small business play, dropped 43% over the same period. And some of the pressure on Shopify stock came from a secondary offering which the company priced at $154.
Meanwhile, markets have seen some pressure at times this year, yet SHOP has been largely immune. Its only real weakness in 2019 came in June, after Roth Capital and Wedbush downgraded the stock on back-to-back days. (Those firms, too, cited valuation concerns.) There have been enough periods of market volatility this year to rattle Shopify stock again. So far, they’ve had little, if any, impact.
SHOP Stock’s Rising Competition
Another potential point of pressure could be on that competitive front. Square is looking to challenge Shopify as it integrates its 2018 acquisition of Weebly. Facebook (NASDAQ:FB) unit Instagram has launched In-App Checkout, which allows brands to sell products directly through that platform. And of course, Amazon (NASDAQ:AMZN) offers small businesses enormous reach as well.
But it’s tough to see anyone taking down Shopify any time soon. Going forward, the nature of digital platforms is that it gets harder for competitors to gain as those platforms grow and network effects take hold.
And it’s not as if anyone can simply enter the market and succeed. As Barron’s reminded readers last month, eBay (NASDAQ:EBAY) acquired GSI Commerce for $2.4 billion in 2011 in an effort to capture the same market as a then-nascent Shopify. eBay sold the business for $925 million four years later, and it was split up by the new owners in 2016.
Shopify’s growth may slow; in fact, it almost certainly will given its exponentially increasing reach. At least at the moment, it’s hard to see rivals gaining much, if any, market share.
The Cycle Turns
I still believe there’s one key risk here that investors haven’t properly discounted: the macroeconomic cycle. Small businesses are notoriously at risk when a recession hits.
Obviously, investors aren’t terribly worried about this fact right now. Cyclical stocks on the whole are trading at low multiples — yet SHOP stock keeps gaining. As cyclical fears have rattled U.S. stocks at points this year, SHOP has been unaffected.
This is a company that still gets over 40% of revenue from subscriptions rather than its take rate on the sale of goods. The number of customers matters. And if the businesses paying for those subscriptions fail — whether because the economy turns or because more entrepreneurs exist than perhaps should at the moment — Shopify’s growth will slow dramatically.
What Can Stop Shopify Stock?
These risks are real — but, honestly, they don’t look all that likely right now. At the very least, they’re unlikely to change the narrative surrounding Shopify stock any time soon.
So what does? Maybe nothing. SHOP stock is expensive, but it has been expensive for all of 2019. Investors keep buying it. That may stop at some point — but I’d hardly be willing to bet against SHOP stock in the meantime.
As of this writing, Vince Martin has no positions in any securities mentioned.