When Shopify (NYSE:SHOP) topped over $400 a share and cracked the top-ten by market capitalization in Canada, it turned out to be the stock’s peak. Since then, the company sold 1.9 million units of shares to strengthen its balance sheet. And while the high valuations are a risk factor, the market is willing to keep Shopify stock from falling due to the growth potential ahead.
With the stock down by around 20% from 52-week highs, when should growth investors step in to buy Shopify?
Investors cannot time an entry point on SHOP stock based on falling P/E valuations. If the market corrects this month in October, it will pull Shopify stock lower.
This also creates a better entry point for investors who believe its growth strategy will play out at historically strong rates. So, investors should set an entry price and wait for the stock to get there.
At current prices, the stock has an upside of around 10% if the analyst price target plays out. Conversely, if Shopify’s five-year CAGR revenue grows by “just” 37.7% as shown here, then the stock is overpriced at current levels.
Shopify’s 1.9 million Class A stock sale at $317.50 a share boosted the company’s cash balance by ~$600 million. This will give the company the flexibility to fund its growth strategies.
What does this boilerplate goal mean? If Shopify invests in the physical fulfillment business, it could bring more grief and complexity to the business. Capital expenditure requirements will increase, straining the balance sheet and lowering its growth rate.
The Competition and Shopify Stock
Shopify does not have many competitors to worry about. The closest competitor is Baozun (NASDAQ:BZUN). Baozun offers end-to-end capabilities across the eCommerce value chain, from IT solutions to warehousing and fulfillment. Yet the company operates primarily in China, whereas Shopify does not.
Shopify has a number of growth initiatives. It announced a translation API that connects merchants and buyers worldwide. Multicurrency for all of its merchants will lower the natural barriers among companies in different countries. And it expects to spend over $1 billion over the next five years to make such tools available to all merchants of any size.
In the second quarter, Shopify added a new point of sale software. Demand forecasting, smart inventory allocation across warehouses, and intelligent order routing are all powered by machine learning.
New features for Shopify pay included giving buyers the ability to add discount codes and to edit saved shipping addresses. Shopify shipping adoption grew to over 42% of eligible merchants.
Strong Growth Ahead
In Q2, Shopify’s subscription revenue grew 38% to $153 million while total revenue was up 48%, to $362 million. Merchant Solutions grew 56% to $208.9 million. Although its adjusted operating income was a loss of $4.8 million, the company has over $2 billion in cash on hand.
So, as the company attracts more entrepreneurs in need of a scalable platform, its user base will continue growing. And since the infrastructure scales, costs will not increase. This will lead to profit growth.
Shopify raised its full-year revenue expectations in the range of $1.51 billion to $1.53 billion. Adjusted operating income will be between $20 – $30 million. For Q3, the company expects revenue of $377 – $382 million. Adjusted income will be between $0 to $3 million. Of the $175 million in stock compensation, Shopify will expense $47 million of it in the third quarter.
The Bottom Line on Shopify Stock
Shopify stock is on the verge of reversing from a month-long downtrend. Where it heads next might depend on market sentiment. Yet long-term growth fundamentals are unquestionable and should be enough to keep Shopify investors happy.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.