For the past decade, tech stocks have been the path to riches and I expect the strength in the sector to continue in 2020, too. One such winner has been Shopify (NYSE:SHOP). If you had invested $1,000 in the shares at the start of July 2015, at $28 on the ground floor when the stock had its IPO, your initial investment would have gone over $16,000. Year to date, Shopify stock is already up about 19%.

In hindsight, we can say that the market has underpriced the growth potential of the company. The group is expected to report Q4 earnings and full-year results for 2019 on Feb. 12. Therefore, now may be a good time to ask whether it is too late to take advantage of the growth story of SHOP stock. Let’s take a closer look.

What to Expect From Shopify’s Next Earnings

When the Canada-based ecommerce service provider reported Q3 earnings in October 2019, markets were not fully impressed. Although revenue rose above expectations, the group reported a surprise Q3 loss.

Revenue was $390.6 million, a 45% increase year over year. Operating losses for the third quarter of 2019 were $35.7 million, or 9% of revenue.

The company sells out-of-the-box ecommerce solutions. And revenue growth comes from two main segments: Subscription Solutions and Merchant Solutions. When it comes to these segments the following occurred in the Q3 results:

• Subscription Solutions revenue grew 37% to $165.6 million. This increase was driven primarily by growth in Monthly Recurring Revenue (“MRR”), as the number of merchants joining the Shopify platform increased.
• Merchant Solutions revenue grew 50% to $225.0 million, thanks to the growth in Gross Merchandise Volume (“GMV”).

As of the end of October, more than a million businesses worldwide have set up an online store with Shopify. In recent quarters, management has also been looking at expanding overseas, especially in non-English-speaking countries. The group is hopeful that it will make money from software subscriptions, payment processing and other merchant services in international markets, too.

Therefore in Q4, analysts are likely to pay attention to whether the company’s overseas customer base continued growing.

Shopify is a momentum stock. Following the Q3 report, the shares initially declined for about week to a recent low of $282.08. And then the stock took off to hit an all-time high of $482.87 on Jan. 31. Therefore, I’d not be surprised to see if we witness volatility with an initial downward bias following the Q4 report.

Long-Term Tailwinds Behind SHOP Stock

According to a recent research piece by investment bank R.W. Baird, the group will soon surpass eBay (NASDAQ:EBAY) to become the second-largest U.S. e-commerce platform behind Amazon (NASDAQ:AMZN) in terms of sales volume generated by merchants using Shopify’s services.

Many on Wall Street credit the company’s success with a wide range of tools that enable store owners to easily manage their businesses. Today, many companies are choosing to bypass brick-and-mortar stores across the board and increasingly selling products directly to the customer online.

In the U.S., ecommerce makes up about 12% of total retail sales. U.S. retail e-commerce sales for the third quarter of 2019 totaled $145.7 billion, marking an increase of 4.4% from the second quarter of 2019. According to Shopify, “[i]n 2019, ecommerce share of total global retail sales was 14.1% and analysts only expect it to increase 2% a year through 2023 … Much of ecommerce growth is attributable to Amazon, which is growing at above-market rates and was expected to account for 37.7% of online U.S. sales in 2019.”

Therefore, in the quarters ahead, we can expect Shopify management to continue the efforts to capture a greater percentage of the total ecommerce pie not only in the U.S., but also globally.

The company’s market cap is about $55 billion and I’d not bet against it passing over $100 before too long. In comparison, eBay’s and Amazon’s market caps are around $29 billion and $1 trillion, respectively.

But I’m no advocate of buying stocks at any price. Therefore, long-term investors should do due diligence on SHOP stock before taking the plunge.

What Could Derail Shopify Stock Short-Term?

Many investors are concerned that the stocks’s valuations might have gone above and beyond what’s deemed as reasonable, even for growth stocks in the tech sector.

One of the metrics I pay attention to is the stocks’s price-to-sales (P/S) ratio, which stands at about 37x. To put the metric into perspective, the S&P 500’s average price-sales ratio is 2.3x.

Another way to look at this number is to compare the company’s current  P/S ratio with its P/S ratios over time. Since going public, SHOP stock’s lowest and highest P/S level have been 6.86x and 37x, respectively. That essentially means that the owners of Shopify stock are paying a lot more for the stock now than they were when the P/S ratio was 6.8x. So it is at the highest level it has ever seen.

Another way to analyze the P/S ratio is to compare it with the ratios of companies in similar sectors. Alibaba’s (NYSE:BABA) P/S ratio stands at 8.9x. MercadoLibre (NASDAQ:MELI) stock’s P/S is 15.6x and the P/S ratio of Amazon is 3.6x.

Although the P/S ratio of the stock is very high, investors should also remember that it is only one of many valuation metrics. Moreover, it does not take into account the profitability or costs of Shopify.

Experienced investors know that it is not quite possible for a stock to defy the laws of gravity forever. However, timing the exact tops and bottoms is also not easy at all.

If you are an investor who also pays attention to technical charts, you may also be interested to know that many short-term indicators would urge investors and traders to exercise caution. I’d not be surprised to see Shopify stock fall toward $400 level in the coming weeks.

So Should Long-Term Investors Buy the Stock Now?

Over the past decade, Shopify has become a giant in a very promising sector. And I expect the Ontario-based success story to continue to reward investors going forward. Its moat in the small- and medium-sized enterprise (SME) e-commerce space will increase not only in North America, but globally, too.

Yet, Shopify stock is fundamentally expensive and its short-term technical charts point to an extremely overbought picture. So it’ll likely take a breather and slip possibly double digits in the coming months. And earnings seasons, especially in a month when broader markets are themselves volatile, can be the perfect time for such a drop.

If your risk/return profile enables you to weather any potential volatility in SHOP stock in the coming weeks, you may want to hold on to your position.

Alternatively you may want to hedge your position with a covered call, if you are experienced with hedging via options. For example, an ATM or slightly ITM covered call that expires on Feb. 21 would give you some downside protection. It would also enable you to participate in a potential up move. And in the meantime, you’d have enough time to analyze the earnings report in detail.

Any new investment into SHOP stock should possibly come with the caveat that much of the potential good news for now has already been priced into the share price.

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