President Franklin Roosevelt wasn’t speaking about Shopify (NYSE:SHOP) when he uttered the famous words, “the only thing we have to fear is fear itself,” but he might have if he was a 21st-century investor. That’s because the recent decline of SHOP stock has spooked many of those who have been bullish on Shopify stock for some time.
The amount of negative chatter regarding Shopify stock and SHOP’s future in e-commerce has increased dramatically in the past month. Here’s why I think the owners of SHOP stock should heed the former President’s words and work past the fear.
Amazon Be Damned
You can’t have a conversation about Shopify without bringing up Amazon (NASDAQ:AMZN), the 100-ton elephant in the room.
Another InvestorPlace columnist, Dana Blankenhorn, recently explained to readers that it is illogical to own SHOP stock when it’s trading at 30 times its estimated 2019 revenue.
It’s hard for value investors or even growth-at-a-reasonable (GARP) price investors to argue with his statement.
And while Blankenhorn’s been down on SHOP stock for the better part of two years, he readily admits that it’s the one stock that he’s been consistently wrong about. Everyone who writes about stocks for a living has a war story or two to tell. I sure do.
Given the metrics of Amazon stock, it does make sense to examine the valuation of SHOP stock more closely. AMZN stock is trading for less than four times the company’s sales, and its revenues are jumping by 30% a year. The e-commerce giant also generated $22 billion of free cash flow over the trailing 12 months.
Another InvestorPlace contributor, Brad Moon, recently pointed out that if Amazon decide to wage war on Shopify, it would end badly for SHOP stock. Brad cited an article by the VP of global commerce strategy at Publicis Sapient that argues Shopify can’t grow large enough to become a threat to Amazon.
In other words, Amazon will enter the fray if it must, but for now, Shopify is merely one of many companies taking the table scraps that the world’s largest e-commerce retailer chooses to leave on the table.
For Shopify, the multi-billion dollar question is, how does it transform from $1.3 billion in trailing 12-month revenue while losing money to putting up Amazon-like numbers?
That isn’t going to be easy. That’s why SHOP stock is going to have the occasional setback as it did in September when it lost 19% of its value.
When Shopify reports its Q3 earnings at the end of October, the owners of SHOP stock will want to see that it’s continuing to execute on its long-term plan. I’m not very concerned about the numbers at this point.
Instead, I want to know about the company’s goals for its Fulfillment Network, which it launched in June to much fanfare. Last month, it also bought 6 River Systems for $450 million to bolster the network.
The Bottom Line on SHOP Stock
As I said in September, I believe that Shopify CEO Tobi Lütke acquired 6 River Systems as much for its three talented founders, two of whom worked for Amazon Robotics, as it did to gain access to the startup’s 20 facilities in the U.S., Canada and Europe.
If SHOP wants its fulfillment network to be competitive with that of Amazon, it certainly doesn’t hurt to have employees with a first-hand understanding of how the e-commerce giant operates.
Investors who want to make big money on Shopify stock are going to have to tune out the negative noise coming from some in the business media and stay the course.
The owners of Shopify stock have nothing to fear but fear itself.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
