Shopify (NYSE:SHOP) is just a month removed from posting a surprise third-quarter loss of 25 cents a share and about three months removed from its 52-week high. In theory, the loss shouldn’t have been surprising and shouldn’t have hurt Shopify stock.
Expenditures in the area of $1 billion for a company that has never posted that much in quarterly revenue, as is the case with Shopify, can be interpreted as fueling growth over profitability.
The current lay of the market land doesn’t have much tolerance for such indulgences, but when it comes to Shopify stock, investors may do well to be patient with the company’s expenditure plans. After all, if you want to get into the ring with Amazon and thrive, you’re going to have to spend some cash.
Since that earnings report, Shopify stock has been mostly choppy, but signs are emerging that the name is poised for near-term upside. Those include a 6% gain on Nov. 26 on above-average volume. That volume anecdote is notable when considering it occurred during a holiday week when turnover can be light because traders are looking to get out of town early.
Recent action suggests SHOP stock is bouncing off an important support area and when that has previously happened, upside from there has been impressive.
“[Shopify] is trading within one standard deviation of its 10-month moving average, after spending a notable amount of time above this trendline over the past 20 weeks,” according to Schaeffer’s Investment Research. “Similar tests of support have occurred four times since 2016, resulting in an average three-month gain of 30.4%, with 100% of the returns positive. A similar surge from current levels would put SHOP above $380 by early 2020.”
The shares closed around $336 on Nov. 26.
Don’t Dismiss SHOP Stock
A month removed from the aforementioned earnings report, it’s safe to say that disappointment is baked into the shares and that sellers wishing to depart Shopify have already done so. Those who are still on the fence ought to consider sticking with it because the good news/bullish prospects far outweigh the bad. For example, the company recently crossed the 1 million merchant milestone. That’s up from just over 40,000 seven years ago.
Shopify’s “million merchant milestone should be lauded not only for the achievement by a steadfast management team with customer-first objectives, but for its consistent financial execution all the way up,” said Rosenblatt Securities Mark Zgutowicz in a recent note.
Another possibly under-appreciated element of Shopify stock is the company’s burgeoning network effect, the scenario where a platform’s users make the platform more valuable. Shopify’s merchants are currently selling more based on per store data. That’s good news for those sellers, the company and investors.
Obviously, Shopify benefits from the ongoing shift to eCommerce from brick-and-mortar stores, but the company is a beneficiary of another seismic shift: the growth of direct sellers, which is what Shopify sellers are.
“Today, direct sales make up just 15% of all sales in America… BUT they are growing 500% faster than retail sales, according to Digital Commerce 360,” reports Forbes.
Bottom Line on Shopify Stock
The rub with Shopify stock is that it by any credible metric, it’s expensive. It’s basically viewed as a software as a service (SaaS) play, a group littered with richly valued names.
However, Shopify trades at multiples exceeding those of the S&P North American Expanded Technology Software Index, the Nasdaq-100 Index and the Russell 1000 Growth Index.
Thing is, Shopify has multiple avenues for generating growth, thereby justify the premiums at which it trades.
“We share investor enthusiasm regarding the growth of e-commerce infrastructure software, and we see platform adoption remaining robust over the next couple of years,” said Morningstar in a recent researh note. “We think the Shopify Fulfillment Network will be a hit for the company and help drive strong top-line growth over a decade. We also see room for penetration in payments, shipping, and capital.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.