More Upside Ahead for Shopify Stock

Shopify (NYSE:SHOP) has gained 37% year to date, including a more than 12% surge over the past week following a stellar fourth-quarter earnings report. The company earned 43 cents a share on sales of $505.2 million, trouncing Wall Street forecasts of 24 cents and $482.05 million.

Fulfillment Investments Now Will Pay off Big for Shopify Stock

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Though that all sounds good, a more discerning eye will show investors that the post-earnings rally took Shopify stock to almost $594, but the stock closed below $533 on Thursday, Feb. 13. Indeed, there’s a chance that the stock will fill the upward gap created by the earnings reaction, meaning some downside could be in store.

The recent rally by Shopify stock sparked a round of price target upgrades from sell-side analysts, several of who call for the stock to climb to $575 or even as high as $600. Split the difference there and call it $587, and an investor is still looking at upside of about 8.2% from where the stock closed on Feb. 13. That percentage could be higher thanks to the company’s ability to cultivate new products.

“Shopify also sees room to make inroads among legacy retail operators looking to accelerate their shift toward modern retail, with features like Flow and Scripts serving as a strong value add for merchants migrating away from legacy software and internally built systems,” said Wedbush analyst Ygal Arounian in a note to clients.

Keeping Expectations in Check

The revenue forecast of $2.13 billion to $2.16 billion for 2020 delivered by Shopify compares with a Wall Street forecast of $2.11 billion. It’s not unreasonable to say that amounts to some massaging of expectations and that Shopify management has left some wiggle room to really trounce estimates.

Chris Silvestre, an equity analyst at Veritas Research, notes Shopify has a track record of topping its sales guidance and the company should do that every quarter for the next couple of years.

When it comes to driving top-line growth, one arrow in the Shopfiy quiver (and there are a few) is the Shopify Fulfillment Network (SFN), something I mentioned late last September when the stock was trading in the low $300s. Management is seen as taking a cautious approach to fulfillment because it pits the company even more squarely against Amazon (NASDAQ:AMZN), but it’s not hard to find robust growth estimates for this business.

“We think the Shopify Fulfillment Network, or SFN, will be a hit for the company and help drive strong top-line growth over the next 10 years,” according to Morningstar.

Those looking for other tailwinds ought to consider Shopify’s gross merchandise volume, or GMV, and payments processing volume.

“GMV on the platform was $20.6 billion, which grew 47% year over year, while gross payment volume processed through Shopify Payments was $8.9 billion, or 43% of GMV,” notes Morningstar.

Bottom Line on Shopify Stock

Saying there’s a bear case for Shopify right now may be somewhat harsh language, but there are reasons to be cautious. First and foremost, any misstep, such as a quarterly revenue disappointment, would likely trigger a significant sell-off.

Second, and on a related note, Shopify stock is richly valued. Actually, it’s getting pricier at 38.17x sales and 666.67x earnings. Those are levels at which a company can’t afford misses of estimates. Fortunately, that’s not in Shopify management’s DNA.

Should the aforementioned post-earnings ebullience continue dissipating, a decline to the $500 area could be an accumulation point for investors willing to wager on more revenue growth for Shopify.

As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.

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