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Even with Prevailing Volatility, Shopify Stock Is Worth the Trouble

Shopify stock is down, but not out and there's a lot to like despite frothy multiples

When it comes to eCommerce stocks, it often feels like the only unanimous decisions are Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA). Even Shopify (NYSE:SHOP), which has more than doubled this year and still has a market capitalization of just $35 billion, paltry by Amazon and Alibaba standards, elicits split decisions if not consternation. But you should be keeping an eye on Shopify stock.

Even With Prevailing Volatility, Shopify Stock Is Worth the Trouble
Source: Paul McKinnon / Shutterstock.com

It’s tough to call it controversy, but for some investors, reservations about Shopify are attributable to the shares residing more than 23% below the 52-week high. A correction of that magnitude isn’t really a correction. By definition, it’s a bear market. Adding to the near-term case against Shopify stock is a gloomy technical outlook. A violation of $300 could lead to downside to the $250 area. SHOP stock closed around $311 last Friday.

And if you want to pile on, shares of Shopify aren’t even close to being cheap even after the aforementioned, recent decline. At 26.51x sales and 16.77x book value, this is still an expensive stock.

Additionally, Shopify management needs to allay concerns regarding execution, profitability and spending, themes that investors are suddenly placing more weight on.

“Investor excitement around the total addressable market, revenue potential and competitive moat is being offset by concerns focused on execution risks, revenue mix and profitability,” said Guggenheim analyst Ken Wong in a recent commentary on the name.

Investors will soon get a glance into the near-term outlook for Shopify as the company delivers third-quarter results on Oct. 29.

Fun With Fulfillment

Arguably, the least glamorous side of the eCommerce business is fulfillment, but it’s of the utmost to the Amazons and Shopifys of the world. As has been previously noted, Shopify is bolstering its fulfillment network and could spend $1 billion or more on the endeavor over the next several years. Wong even sees Shopify becoming a fulfillment thorn in the side of Amazon.

“We think the Shopify Fulfillment Network will be a hit for the company and help drive strong top-line growth over a decade,” said Morningstar in a recent note.

The recent purchase of 6 River not only provides Shopify with some fulfillment scale, but some of 6 River’s founders are former Amazon insiders. That type of inside knowledge of a rival and intellectual property is hard to come by.

However, the $1 billion spending goal on fulfillment may not be enough for Wall Street to get excited about Shopify stock. Analysts may actually want to hear a meatier fulfillment figure from management.

To that end, investors should not underestimate the importance of fulfillment in the eCommerce space and the positive benefits to Shopify stock should the company prove adept at fulfillment mastery.

“Even simple orders can create problems if companies aren’t prepared operationally,” according to Manhattan Associates. “And the reality is that with the growth of the channel, e-commerce orders will only get larger and more complex moving forward.”

Bottom Line on Shopify Stock

At its core, Shopify is a platform for small to medium businesses (SMBs) to sell goods. The upside of that is that the SMB is massive, potentially as high as $10 billion on the platform front, but last year, Shopify didn’t even generate 5% of that figure in subscription revenue, indicating there’s ample room for growth.

The risk for Shopify stock is that new SMBs are notoriously volatile and have a high failure rate, leading to more churn at Shopify than investors are willing to deal with.

“The failure rate for new businesses is very high—between 25% and 75% depending on the study and the time period,” according to Morningstar. “While there may be 47 million potential users in the target market, users on average generate low ARPU for the company.”

For those looking to take the long-term view of Shopify stock, there’s definitely winning potential here, but it likely requires revenue growth of 30% or more over the next several years.

Todd Shriber does not own any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/shopify-stock-is-worth-the-trouble/.

©2019 InvestorPlace Media, LLC