This Is Just the Start of a Rough Correction for Shopify Stock

Shopify (NYSE:SHOP) has been a star for ahile, but it looks as if the shine on Shopify stock is beginning to fade.

This Is Just the Start of a Rough Correction for Shopify Stock
Source: justplay1412 /

To be fair, they’re not alone. Lately, there has been a deflating of many tech high-fliers. Just look at the drops in stocks like Slack (NYSE:WORK), Roku (NASDAQ:ROKU), Workday (NASDAQ:WDAY) and Okta (NASDAQ:OKTA).

What’s interesting is that the overall markets have not been under much pressure. In other words, it looks like we’re seeing a classic rotation.

So what now? What are the opportunities? Well, when high-fliers start to fall, there could easily be an overshooting on the downside. Let’s face it, when investors have substantial gains, it’s tempting to pull the trigger when things go awry.

Shopify is one company where I think this could easily be the case. Until late summer, the chart was mostly on the upward trajestory. Consider that – for the past three years – the average compounded growth rate was a staggering 89.6%!

But now investors are really getting nervous. There have been declines in SHOP stock for more than the last week, and it’s starting to look scary.

Despite all this, the valuation is still far from cheap. The market cap is currently about $34 billion and the price-to-sales multiple is at a hefty 26X.

A Closer Look at Shopify Stock

The recent secondary offering of $603 million may be another indication that the valuation of SHOP stock is at frothy levels. Hey, management doesn’t want to pass up a chance to cash-out with little dilution, right? Definitely.

Yet the valuation is not the only issue with the SHOP stock. Keep in mind that SHOP stock could be vulnerable to a decelerating in the global economy. There is not only a slowdown in major parts of Asia and Europe but even the US is starting to sputter.

The problem is that Shopify caters primarily to small businesses. And yes, they tend to get the hardest hit during slow growth environments.

According to the Shopify annual report:

“Economic downturns may also adversely impact retail sales, which could result in merchants who use our platform going out of business or deciding to stop using our services in order to conserve cash. Weakening economic conditions may also adversely affect third parties with whom we have entered into relationships and upon which we depend in order to grow our business. Uncertain and adverse economic conditions may also lead to increased refunds and chargebacks, any of which could adversely affect our business.”

In other words, Shopify could have a tough time keeping up its torrid growth rate. True, the company has been smart to add new capabilities, such as fulfillment. But such moves may not be enough to deal with customers that have dropping sales – or even go bust.

In the meantime, Shopify is facing more competition. Tech operators like Adobe (NASDAQ:ADBE), Square (NYSE:SQ) and even Facebook (NASDAQ:FB) are ramping up their efforts to get a piece of the lucrative market.

Bottom Line on Shopify Stock

There’s little doubt that Shopify is a well-run and innovative company. And over the long-run, it may ultimately become a powerhouse like the mighty Amazon (NASDAQ:AMZN).

After all, as seen with the latest earnings report, Shopify is certainly showing strong traction. Revenues jumped by 48% to $362 million and subscription revenues were up 38% to $153 million. Gross Merchandise volume was up 51% to $13.8 billion.

But keeping up this growth will not be easy. If anything, the current valuation essentially pricing in near perfection.

However, in light of the deteriorating global economy, there could easily be more and more disappointment.

Besides, it appears that investors are taking a different tact on high-growth stocks. There are already ominous signs, such as the implosion of the WeWork IPO.

Whenever there is a major change in the market psychology, the impact is usually not temporary.

Thus, when it comes to Shopify stock, it’s probably best to be very patient until making a purchase.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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