3 Reasons Why SHOP Stock Will Be Just Fine

In an increasingly crowded e-commerce space, SHOP may be the best option

In a previous article, I looked at Shopify (NYSE:SHOP) stock in relation to its secondary stock offering. Over the summer, the company raised capital to pay for their $450 million acquisition of 6 River Systems. At the time, SHOP stock was in the middle of its fall from its record high of $406.99 to a low of $295.47.

Free of an overt threat from Amazon, Shopify stock can continue on its growth trek.
Source: BalkansCat / Shutterstock.com

SHOP is not yet profitable. So, a secondary stock offering strongly suggests that investors should not expect profits anytime soon. This led me to wonder if investors should buy SHOP stock when the company was clearly suggesting it may be time to sell.

However, as the e-commerce space grows, even the largest companies are facing challenges. Amazon (NASDAQ:AMZN) just reported its first decline in earnings growth in two years. And that is independent of the regulatory pressure that will only intensify during the coming election year. Alibaba (NYSE:BABA) stock is under pressure as investors question its valuation due to the ongoing trade war.

With this in mind, I can think of three reasons why Shopify stock might be the best option in the e-commerce space:

SHOP Stock May Have Found Support

After falling to $295.47 in September, SHOP stock climbed back to $344.30, the stock retested the prior lows but seemed to find support right around the $297 price. As of this writing, shares are still down about 20% from that high.

SHOP stock may well test these lows again once earnings are released on Oct. 29. However, if the stock continues to find support at that level, investors may find it to be an attractive target as the holiday season approaches.

And let’s not forget one overlooked point. Even if it falls 10% below its previous low, SHOP stock would still be up over 90% for 2019.

But isn’t Shopify stock overvalued? As my colleague InvestorPlace writer Bret Kenwell wrote recently, a high valuation for such a growth stock is table stakes. In the same article, Kenwell also looks at the SHOP stock chart as a better guide for short- and intermediate-term investors. I agree with Kenwell on both points. Shopify may be behaving like Amazon, but it’s not Amazon.

Speaking of which…

Amazon Is Not a Present Threat to Shopify

One of the arguments against Shopify stock is that Amazon (NASDAQ:AMZN) is merely tolerating the upstart company. The thinking is that when the time comes, Amazon will change their existing model and crush it.

It’s true that Amazon has a history of being ruthless in achieving its business objectives. Analysts can also say that Amazon’s dominance gives it no incentive to target Shopify at the moment. But Amazon has troubles of its own. And it has nothing to do with their recent decline in earnings growth.

Amazon is under intense anti-trust scrutiny on both sides of the political aisle. Most notably, Democratic presidential candidate Sen. Elizabeth Warren is openly calling for a breakup of Amazon’s business. And, in an article for Adweek, Lisa Lacy cites that some industry observers could see Amazon spinning off their Amazon Web Services (AWS) as a preemptive strike against regulators.

“If the writing is on the wall and pressure is building for regulatory action…then (Amazon) might decide to do it in a way they can control,” says Matthew Wilson, an associate professor of political science at Southern Methodist University.

To summarize my argument, Amazon is likely to mind its p’s and q’s during this coming election year. And that gives Shopify the benefit of time to continue to grow.

Shopify Will Continue to Grow

This leads to my last reason to believe that Shopify is the best near-term play in the e-commerce space. This is less of a standalone argument and more of an extension of the prior two. I believe that SHOP stock is not a falling knife. I also believe that Amazon is going to play nice in the near term. With that in mind, the only obstacle to Shopify’s growth is Shopify. And that’s not really an obstacle at all.

In the short term, SHOP stock has some issues to work through. Shopify is beginning to behave like Amazon. This is giving investors a reason to put pressure on the stock about their execution, profitability, and spending. This may cause some downward pressure on the stock if the company’s earnings report does not provide the guidance investors want to hear.

But the long-term outlook for SHOP stock looks very good. Wallet Investor is a startup that uses artificial intelligence-based machine learning for technical analysis of stocks, forex, commodities, and cryptocurrency. Their analysis shows Shopify stock growing to $544.29 in one year and as high as $1,427.51 in five years.

The bottom line is that SHOP stock is a growth stock, and that’s going to come with volatility. But if you’re looking to invest in the e-commerce space, SHOP may just be the best option.

As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/3-reasons-buy-shop-stock-now/.

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