After a rocky summer, Shopify (NASDAQ:SHOP) stock has been on fire. With its latest rise, it’s got investors wondering if new all-time highs could be in store, possibly by year end.
Shopify stock is a very tough one for investors to size up. I consider myself a growth-stock investor, but not one that will buy anything at any price. When other growth stocks were hit, I expected Shopify to move significantly lower as well.
I was long the stock because I believe (and still believe) in its long-term future. But its rise from the 2018 lows to its 2019 highs was simply too much, too fast. I sold Shopify at $400.97 on Aug. 27.
Trust me, it’s not a humble brag. I may have had a timely sale on the upside, but I got too greedy and too complacent looking for more downside. While I was able to re-initiate long positions in some of my favorite growth names on the massive dip we saw this year — like Roku (NASDAQ:ROKU), Alteryx (NASDAQ:AYX), The Trade Desk (NASDAQ:TTD) — my Shopify orders never triggered.
Now back up to $370, investors and traders alike are wondering what’s next.
Trading Shopify Stock
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From peak to trough, Shopify fell about 30%. Catching the trough is hard, but investors — myself included — had ample time to get Shopify while it was down 25%-plus from the highs. With Twilio (NASDAQ:TWLO), Roku and others down 40%, Shopify felt like it had more downside on the way.
In any regard, here’s the setup. Shares have been consolidating between $360 and $375. If it can breakout over $375, $400-plus is on the table. Below $360 and $340 is possible. Further, look to see if the 50-day moving average still acts as support when Shopify stock eventually tests it.
There’s a Shift
I have had some great discussions about Shopify with other investors. But the main hang-up usually revolves around valuation. For some stocks, valuation is critical. In my view, growth stocks are more about the story, the secular trend, and whether the business is sustainable over many years.
To be clear, valuation does matter. But in the case of many growth stocks, it is not the top priority.
Why like Shopify in the first place? Like Roku in streaming video or Alteryx in the data explosion, Shopify is planting its flag in a secular growth trend: e-commerce.
I’m not saying traditional retail will completely go away, but it’s hard to deny that the e-commerce space is slowing down. And while e-commerce sales are exploding higher, they still just make up a fraction (~11.2%) of total retail sales.
Further, if brands wanted online exposure and online sales, they often had to saddle up with Amazon (NASDAQ:AMZN). The only problem is that Amazon is in business for itself, and therefore it controls the entire customer experience. Even some of the largest brands, like Nike (NYSE:NKE), Duracell and Procter & Gamble (NYSE:PG) have to play by Amazon’s rules. P&G’s toilet paper sits next to Amazon’s branded toilet paper on the products page. Duracell batteries sit next to Amazon’s batteries too.
But with the emergence of Shopify, there’s a shift happening in e-commerce. Brands big and small can now create storefronts, accept payments, and control the customer experience. P&G products are next to P&G products, not competitors.
Put simply, Shopify won’t put Amazon out of business, but it’s changing the online shopping game.
But the Valuation
Game-changers come at a price, and Shopify is no exception. Estimates call for robust revenue growth of about 45% this year and another 35.5% growth next year. However, with a $43 billion market cap, Shopify stock trades at roughly 27.7 and 20.5 times this year and next year’s revenue estimates, respectively.
That’s a very lofty valuation, even for a company that is technically profitable and growing earnings at a very fast past. It’s honestly reminiscent of Amazon. At the same time, could I see Shopify having a valuation of $100 billion to $120 billion (and possibly much more) in a decade?
Certainly. And from a $35 billion market cap (about 18.5% below current levels), that’s a 200% to 300% return over ten years. That said, I am trying to see the forest through the trees here. The valuation is a concern, but will not act as the end-all, be-all for Shopify.
I would love another dip in this name to get another chance at it on the long side.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long ROKU, AYX, and TTD.
