Is Shopify (NYSE:SHOP) the future of eCommerce? Investors are increasingly betting that Shopify stock will be the next online star.
A new wave of eCommerce is forming and threatens Amazon (NASDAQ:AMZN). Shopify demonstrated that fact with its Black Friday sales last holiday season when its platform averaged nearly $1 million in sales every minute. Impressive, to say the least.
As Amazon has gotten busy with side projects such as selling groceries and trying to disrupt UPS (NYSE:UPS) and FedEx (NYSE:FDX), they’ve seemingly given a lot of ground to rivals in their core online retail space. And Jeff Bezos’ headline-grabbing behavior has raised eyebrows as well.
All in all, Amazon stock is down nearly 10% since its peak last summer. That’s terrible in a time when nearly all major tech stocks are flying to new all-time highs, by comparison.
Shopify has taken advantage of Amazon’s weakness. Not only is Shopify growing at a breathtaking rate, it’s also building up a narrative that it will be the first company capable of taking the fight to Amazon’s core business in years.
Unfortunately, for anyone buying today, that narrative has driven SHOP stock to an exceedingly high valuation, and the optimism continues; Shopify hit new all-time highs this week.
Shopify: Lock in Trading Gains
Shopify has gone on an absolutely exhilarating tear over the past year. Since the December 2018 low, Shopify stock has nearly quadrupled. Just over the past two months, the stock is up 50%. This is not normal. As great a company as Shopify may be, its fundamental value simply hasn’t increased 50% in two months, or 300% in a year.
What’s driving the move? M&A chatter may be part of it. Last month, CNBC’s Jim Cramer suggested that larger companies were taking a look at acquiring Shopify. Though, with the company’s market capitalization now over $50 billion, there’s only a few tech companies big enough to buy a company of Shopify’s size with ease.
Unless a merger hits, there’s little to drive the stock price in the short run. The last earnings report was actually rather underwhelming; the share price run seems largely driven on sentiment rather than quickly improving fundamentals.
The Company’s Long-Term Investment Prospects
To be clear, Shopify isn’t quite a slam dunk buy and hold investment at this price either. There’s certainly the possibility that Shopify is able to become the next Amazon. The current $50 billion market cap still leaves massive upside potential in that case. However, the market is fully pricing in near-term gains.
In fact, take a look at Morningstar’s Dan Romanoff’s analysis. He gives Shopify some fairly ambitious assumptions over the next five years, and still finds the stock to be more than 50% overpriced. Romanoff wrote that:
“Our fair value estimate for Shopify is $175 per share, which implies an enterprise value/sales multiple of 11 times, adjusted price/earnings multiple of 576 times, and a 0% free cash flow yield. Our forecast includes a continued shift to merchant solutions from subscriptions. We model total revenue growth of 45% in 2019, decelerating to 23% in 2023, representing a five-year compound annual growth rate (CAGR) of 31%.”
Needless to say, for investors let alone short-term traders, a pullback to $175 would be a rather painful fall from the current $465 price. Great world-changing companies often fall precipitously at one time or another despite being home run investments; Amazon famously lost more than 90% of its value in the dot-com bust.
Is Shopify Really a Monopoly in the Making?
If Shopify can truly grow into the next Amazon, it’s still an easy hold today, despite the sharp potential drop in the short-term. However, there are reasons to be skeptical of just how powerful Shopify’s position is.
A recent article in ModernRetail noted how Shopify’s platform has had notable issues scaling, and sometimes crashes when well-known internet personalities such as Jeffree Star and Shane Dawson have launched stores on Shopify.
That author quoted an eCommerce agency CEO who pointed out Shopify’s short-comings:
“There’s a big gap with what [Shopify’s] enterprise offering is and other enterprise offerings out there,” the CEO said. “It’s definitely not true enterprise […] Once you’re doing $10 million to $20 million online and once you have a certain amount of complexity, it becomes very difficult to scale on Shopify,” they said.
Shopify is a nice plug-and-play solution for up-and-coming e-commerce ventures. But what happens if the company’s biggest customers graduate to more sophisticated platforms like WooCommerce or Magento?
It’s the Square (NYSE:SQ) problem all over again – attracting tons of small business is great, but if firms leave your platform for greener pastures as they get bigger, overall revenue growth could come up well short of expectations.
Shopify Stock Bottom Line
Realize that Shopify’s share price has run far ahead of its current value today. If you’re a swing trader, there’s no reason to stay long here. Sell into the jaw-dropping 50% in two months rally. The stock market won’t keep going up every day forever, there’s nothing wrong with turning some paper gains into real cash while the market is euphoric.
If you’re a long-term investor and are willing to hold Shopify for the next five or ten years through thick and thin, then there’s still a solid case for hanging on to its shares today. If the company keeps up its current growth trajectory, today’s valuation will hardly matter. That’s a huge if, though.
For a lower-risk play on second-wave eCommerce, consider some of the Software-as-a-Service companies that provide back-end support to platforms like Shopify.
Avalara (NYSE:AVLR), for example, provides sales tax collection and accounting functions to online sellers and has built-in support to platforms like Shopify and Wix (NASDAQ:WIX). Avalara is growing at 40%/year and has a much more palatable valuation at least for the time being.
At the time of this writing, Ian Bezek owned FDX and AVLR shares. You can reach him on Twitter at @irbezek.