Shopify Stock May Finally Cool Down After Its Epic Rally

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With Shopify (NYSE:SHOP) stock taking a dip along with the rest of the market, is now the time to buy? With shares closing at $465.66 on Jan. 31, Shopify is just off its 52-week high of $482.87. But with earnings coming out pre-market on Feb. 12, we could see big moves (upward or downward) pretty soon.

Shopify stock
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Trading for 513 times estimated 2020 earnings, Shopify stock touts a frothy valuation. Yet this hasn’t stopped investors from bidding up shares 47% since Nov. 1 alone. The company’s e-commerce software-as-a-service (SaaS) platform is too hot to touch. As a result, investors have priced in pretty much all of the company’s future upside.

Since July, I’ve made the bear case for Shopify stock. There’s no doubting Shopify’s growth prospects. Yet, is it worth going long as such a high valuation? I may have been too early regarding rating Shopify a “sell.” But with the runaway bull market cooling down, we may finally see Shopify shares make additional dips downward.

With bears proven wrong for the past year, why sell Shopify stock now? With concerns over sustainable growth, along with a market less bullish on pushing growth stocks higher, today may be the right time to sell. Let’s dive in, and see why shares are a sell at the current price.

Slowing Growth Could Stop Shopify Stock in Its Tracks

As this bearish Seeking Alpha contributor recently discussed, Shopify’s revenue growth rate is falling. Sales growth has cooled from 50% in the first quarter (Q1) of 2019,  to an estimated 40% for Q4 2019. 40% growth is nothing to sneeze at. But it does indicate that Shopify can’t grow at a substantial clip forever. Shopify’s business model is also dependent on up-selling services from its “Merchant Solutions” unit to new sign-ups at its “Subscription Solutions” unit.

On the other hand, this concern may be exaggerated. As InvestorPlace’s Bret Kenwell wrote last month, Shopify has ample opportunity signing up large-scale enterprises like Nike (NYSE:NKE) and Procter & Gamble (NYSE:PG). As Kenwell discussed, these large companies don’t want to be beholden to Amazon (NASDAQ:AMZN) anymore. Using Shopify’s platform, billion dollar brands can break free of Amazon, and pursue e-commerce on their terms.

There are other catalysts at play for Shopify stock. Earlier this month, Credit Suisse’s Brad Zelnick reiterated his “outperform” rating, citing “secular growth opportunities in 2020.” The analyst believes any progress related to the company’s Shopify Fulfillment Network could move shares higher. Scaling up to compete with Amazon, I concede Shopify does have a shot in becoming a key competitor to the e-commerce powerhouse.

But buying Shopify stock today is an expensive bet on these catalysts. While Shopify has runway to grow significantly in the next decade, why buy now when a more attractive valuation could be around the corner?

Future Price Movement Hinges on Q4 Results

As mentioned above, Shopify stock trades for 513 times analyst estimates for 2020 earnings. While not entirely similar, Square (NYSE:SQ) trades for around 80 times 2020 earnings. Amazon’s forward price-to-earnings (P/E) ratio is 66.

It may be arbitrary to use P/E in terms of valuing Shopify stock. The company is just starting to become profitable. But with so much upside priced into shares, its easy to see Shopify grow into its valuation. As growth starts to cool down, shares are not as likely to rally to the $500 price level in the short-term.

So, what if Shopify stock cools down a bit? Could the stock realistically fall back to prices seen in early 2019? A lot hinges on Q4 earnings. But as InvestorPlace’s Brad Moon discussed Jan. 30, Amazon’s results (which had yet to be released) could be a harbinger of Shopify’s Q4 results.

As we know now, Amazon beat expectations with its Q4 results. This may not be an apples-to-apples comparison. Amazon’s year-over-year growth was 21%. But Shopify stock is priced to expect higher rates of growth. Guidance gave revenue estimates in the $472 million to $482 million range. In other words, around 37%-40% growth.

What happens if Shopify announces record-breaking sales, yet growth at the lower end of this range? Or worse, growth below the 37% floor? Even with strong sales growth, Shopify stock could fall lower due to results not matching expectations.

Shopify Stock May Finally Be Topping Out

With earnings around the corner, we could see big moves in Shopify stock fairly soon. But will shares rebound to $400 (and higher), or start falling back closer to the $300 price level (or below?). As it scales up, Shopify’s growth rate is cooling down. It’s hard to see shares sustaining their high valuation.

If you bought Shopify stock at lower levels, why let it ride as the runaway bull market fades? You may kick yourself if Q4 results beat expectations. But if results fail to live up, shares could just as easily fall further.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/shopify-stock-cool-down-after-epic-rally/.

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