It Is Time to Be Cautious With Shopify Stock as Competition Heats Up

On the surface, Canadian e-commerce company Shopify (NYSE:SHOP) has all the appearances of being a stock to buy. High flying SHOP stock is down 19% since the end of August, after a better-than-expected earnings beat pushed the stock up 28% over the course of that month.

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There are signs the fall correction may be over, with SHOP stringing together several days of gains, including 1.5% to close the day on Friday.

However, it’s also possible that the rough patch isn’t over yet. In particular, the specter that its success is breeding competition is becoming a bigger concern.

Success for SHOP

Shopify has been very successful in becoming the e-commerce platform of choice for small businesses. The company’s software is easy to use — and it’s affordable. Shopify has effectively removed many of the barriers to becoming an online retailer, encouraging individuals and small companies to take a crack at online selling. And the company has implemented measures to grow that business further. 

This includes going head-to-head in the brick-and-mortar retail space against Square (NYSE:SQ) with its own line of payment processing hardware. In September, Shopify announced the acquisition of 6 River Systems, a company focused on robotic warehouse fulfillment solutions. The move puts Shopify in a position to expand its fulfillment network in the U.S. and Canada. It also makes it more competitive against Amazon (NASDAQ:AMZN) in delivery of purchases. 

With global e-commerce sales pegged at $2.9 trillion in 2018 and growing, the potential for Shopify to expand is huge. After delivering first-quarter and Q2 earnings that smashed expectations, the stage was set for SHOP stock to surge. By the time it hit $406.99 on Aug. 27, Shopify stock was up nearly 194% on the year.

Success Breeds Competition

A number of issues were involved in the correction that hit SHOP over the past month and a half. 

Like many companies, Shopify has been impacted by the ongoing trade war between the U.S. and China. Tariffs that make products more expensive and threaten to cut consumer spending have the potential to impact online retailers, and that means Shopify’s revenue could take a hit. A $603 million secondary share offering also led to a SHOP stock drop in September. 

The longer-term problem is that Shopify’s success has not gone unnoticed. And that means the specter of competition. We saw the first signs of that in March, when Facebook’s (NASDAQ:FB) Instagram announced Checkout, an online shopping tool that lets users buy products directly from the app. On Sept. 23, Microsoft (NASDAQ:MSFT) launched Dynamics 365 Commerce, new tools that helps retailers create online product pages. That’s not a direct “build your own online shopping site” like Shopify — yet — but it’s another step in the company’s rumored move toward doing so. 

Then there is the sleeping elephant to Shopify’s mouse: Amazon. Essential Retail makes the case that Amazon doesn’t duplicate what Shopify is offering to small online retailers because it currently has no need to. As successful as Shopify has been, it’s no real threat to Amazon at the moment. But should Shopify begin to scale up to the point where it does eat into the e-commerce giant’s sales, Amazon would come at the Canadian company “hard and fast” with a competing solution.

If that happened, the results for Shopify would not be pretty.

The Bottom Line on Shopify Stock

After Friday’s close, SHOP stock is at $329.26, but that’s still up a whopping 157% year-to-date. Given that rapid rise and the challenges the company could face in coming months, Shopify stock may not be quite the bargain that it seems.  

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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