The current mood surrounding Shopify (NYSE:SHOP) is a somber one. Although investors understand why the company is shelling out $450 million to acquire a warehouse-robotics outfit, the news sent SHOP stock sharply lower that day. It’s since fallen a total of 17% from its late-August peak. That stumble triggered a technical sell signal in and of itself.
More of the same may be in store too. Few traders want to catch a falling knife, particularly when that knife has been dropped from a great height as Shopify stock has.
Nevertheless, it looks like the selloff has largely run its course. Though the SHOP stock valuation is still outrageous by most any standard, this company really is the long-term threat to Amazon.com (NASDAQ:AMZN) it’s being made out to be. The bigger it gets, the faster it’s going to get bigger.
Shopify Stock Hit by Profit-Taking
It’s often compared to Amazon.com, and it’s not an unfair comparison. At its core, however, e-commerce newcomer Shopify has earned acclaim by becoming much that Amazon isn’t.
Namely, the Shopify platform allows its users to control their own storefront, rather than force them to plug into a rigid selling framework where they may have to compete with Shopify itself.
To that end, Shopify is a threat to eBay (NASDAQ:EBAY).
And yet, Shopify is increasingly looking like Amazon behind-the-scenes. A week ago, the organization announced it would be outright buying 6 River Systems, which develops robotic fulfillment (warehouse and logistics) solutions.
Investors who had seemingly remained fans of Shopify through May, when the company announced its purchase of Handshake, balked this time around. However, it’s possible the prod for this weakness was tethered more to the market’s tide. It’s also arguable that the big 245% seen between late last year and August of this year spurred profit-taking.
Regardless of the reason, the weakness became self-fueling. SHOP stock broke under its pivotal 10-week moving average line last week, simultaneously snapping straight-line technical support that had been in place since early this year.
That breakdown is a common sell signal in and of itself and traders responded in kind.
But, nothing lasts forever. While Shopify stock may see more downside from here, the company is no mere flash in the pan. Amazon and eBay both have good reason to be concerned.
Shopify Stock Is the Real Deal
Valuation-minded investors are legitimately concerned. Shopify stock is trading at 28 times its trailing twelve-month revenue versus the S&P 500’s average of 2.2.
Shares are valued at 340 times next year’s projected non-GAAP/operating earnings of 97 cents, versus the current marketwide average of 17.0. Never even mind the fact that the company is still bleeding money on a GAAP basis.
This is a case, however, where the valuation is the least critical piece of trading information. SHOP stock is a story stock, with all the rights and privileges thereof. The trajectory is the key.
That trajectory right now is a steep angle too. This year’s revenue is on pace to improve 43.4% year-over-year, while next year’s top-line growth is modeled at 34.3%. Though not GAAP numbers, next year’s projected earnings of 97 cents per share is a 59% improvement on 2019’s expected bottom line of 61 cents per share of SHOP.
Perhaps the best argument to own a stake in Shopify, however, is the one that’s most difficult to quantify. That is, the bigger it becomes, the easier it becomes for it to grow at an even faster clip.
More revenue (and its ensuing cash flow) allows the organization to invest more in its own growth via deals like Handshake and buying 6 River Systems.
Canaccord’s analysts may have said it best in June, after the Handshake deal but before the 6 River Systems deal, noting“\:
“In our view, Shopify is getting to point at which breadth of product, vibrancy of partner ecosystem, and general retail scale will enable the firm to pull away at an exponential pace.”
That pace has already put Shopify on a trajectory to become bigger than eBay this year, as measured by the amount of merchandise volume handled.
Bottom Line on Shopify Stock
That optimism certainly won’t stave off a near-term selloff. Indeed, given the sheer scope and speed of the gain that took shape during the first eight months of the year, at least a little more selling could be expected from current levels.
We’re also at a time of year that’s tough for stocks anyway, especially when it’s the third year of a presidential term.
Don’t let the short-term turbulence distract you from the long-term story though. It could take years to fully establish a complete warehouse network that utilizes 6 River Systems’ technology, just as it took years for Amazon to build its own warehouse-automation solutions.
It’ll be worth the wait though, and the company will certainly improve its offering in other ways in the meantime. The market’s more than apt to reward incremental progress between then and now, given the strength of the back-story.
Just be patient with any entry, and bear in mind one doesn’t have to find the exact bottom to still make good money.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.