Sometimes it’s best to avoid the herd altogether.
More often than not, the herd gets things backwards and wrong. In fact, back in October 2019 naysayers decided to avoid Shopify (NYSE:SHOP) after the company announced a secondary offering of 1.9 million shares for $317.50 per share.
While some disagreed with me, I noted that I expected “SHOP to resume its incredible uptrend, especially as SHOP just begins to jump on the cannabis bandwagon.”
At the time, SHOP stock traded around $311.
It’s now up to $402 per share, thanks in large part to its more than $2.9 billion of global sales over Black Friday and Cyber Monday. That’s up from the $1.8 billion it generated during the same period in 2018.
However, after the impressive run of SHOP stock in recent weeks, I now believe that Shopify stock is overbought and should be avoided in the near-term.
Avoid SHOP Stock in the Near-Term
At the moment, SHOP trades at over 30 times its sales, a level that has been a reliable indication of a top, as pointed out by InvestorPlace contributor Tim Biggam.
“The current price-to-sales ratio is also nearly double the 5-year average of 16.08. At some point valuations do matter, especially given that revenue growth is slowing. Plus, a 30x P/S ratio is just mind boggling unto itself.”
Shopify stock is also trading at a PEG ratio of 36 and 15 times its book value.
Also, technically, after refilling a bearish gap dating back to early September 2019, it’s become stretched at its upper Bollinger Band (2,20), with over-extensions on relative strength (RSI), MACD, and Williams’ %R (W%R). Going forward, I believe Shopify stock could drop back to its 50-day moving average of $324 per share.
SHOP Will Grow Over the Long-Term
While there are plenty of concerns about the valuation of Shopify stock, SHOP will grow a great deal over the long-term. We have to consider that overall e-commerce demand will only increase over time, giving SHOP stock the opportunity to benefit from incredible growth, as I’ve noted in a previous column.
According to eMarketer, global e-commerce will rise nearly 21% in 2019 to $3.535 billion. By 2021, global e-commerce could reach $5 trillion. We must also remember that retail’s future is online. As smaller brick-and-mortar companies wake up to that fact, they’ll turn to Shopify.
SHOP’s Growth Has Been Nothing Short of Impressive
In October, Shopify announced that more than 1 million merchants are now using its platform. “This is kind of blowing my mind right now,” CEO Tobi Lutke said. “I had an investor who ended up not investing because they told me that the worldwide market for online stores was about 40,000 stores. So, it’s just amazing to zoom out and see what happened, how many people are building their businesses, from every downtown area in every city, to the most remote islands in the middle of the Atlantic.”
That shows that Shopify’s business is accelerating. In February 2019, the company announced it had 800,000 customers. Shopify also reported that its Q3 net revenue had jumped 45% year-over-year to $390 million. However, that was a slowdown from the 48% revenue YoY growth in Q2.
Then again, it’s natural for growth rates to ebb and flow.
At the same time, SHOP did post a Q3 net operating loss of $72.8 million, which shocked investors. However, that was caused by a one-time tax charge associated with intellectual property issues.
In addition, SHOP’s MMR, or Monthly Recurring Revenue, did increase 34% YoY to $60.7 million, as of September 2019.
“Our strong results in the quarter were driven in part by the success of our international expansion, which is just one of the many ways we are investing in the platform,” said Amy Shapero, Shopify’s CFO. “By carefully balancing these multiple opportunities that have different investment time horizons, we can keep investing in the innovations that will power merchants in the future while helping them grow rapidly today.”
The Bottom Line on SHOP Stock
In the near-term, I’d avoid SHOP stock due to its valuation and technical overextension.
However, I still believe that Shopify stock should be bought on a pullback and then held for the long-term. Remember, brick-and-mortar retailers are moving online, which will benefit SHOP. Secondly, the value of global e-commerce growth could reach $5 trillion in the next two years. Finally, the company’s customer base is increasing meaningfully. In fact, it went from just 800,000 in February 2019 to 1 million in October. All of that makes it tough to argue against long-term growth.
Again, in the near-term, avoid SHOP stock. However, it’s a strong buy on pullbacks.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
