Shopify (NYSE:SHOP) is reaping the benefits of its positive earnings report this morning. Shares of Shopify stock are currently up about 15% to nearly $570 after fourth-quarter results that beat estimates.
The company reported that it had adjusted net income of $50 million, and earnings per share (EPS) of 43 cents on revenue of $505.2 million. The consensus estimate had been for 24 cents of earnings on revenue of $482.05 million, with a hoped-for “whisper number” of 30 cents.
Shares that closed at $492.75 on Feb. 11 jumped almost $34 each when the results were announced. Shopify stock opened at $494.07 on Feb. 12, at market cap of $57.1 billion, before the earnings caused a massive jump.
The Transaction Processing Boom
The reason for Shopify’s rise is clear to Michael Nugent, a lecturer at the College of Business Stony Brook University:
“The three main catalysts for the rapid price movement for Shopify are: explosive growth in revenues, the increasing price-earning multiples for the fin-tech payment solution sector and the current bubble in financial sector technology.”
With that in mind, Shopify said its fourth quarter revenues were up 47% from the same period a year earlier. If it could sustain those earnings for a full year, it would have a price-earnings ratio of 309 and a price-sales ratio of 29.
Meanwhile, Visa (NYSE:V) sells for almost 20 times sales, but is only growing at 10% per year. Mastercard (NYSE:MA) also sells for 20 times revenue, with a slightly higher growth rate. And, Square (NYSE:SQ) sells for about eight times sales, with a growth rate of 31%. However, while Visa and Mastercard are profitable, Square continues to lose money.
This puts Shopify in a unique position, where it’s growing fast and earning a profit in a niche investors want.
Another point powering Shopify stock is the idea that it’s “coming for Amazon (NASDAQ:AMZN),” as one headline put it recently. Instead of just doing transaction processing like Square does, Shopify handles the entire merchant site. With that, the company recently bought 6 River Systems so it can begin fulfilling more orders.
The Bearish Case for SHOP Stock
Overall, I have been a long-time bear on Shopify. As recently as early December, I recommended that readers “avoid the dip” in Shopify “at all costs.” At the time, Shopify was trading at about $336 per share. So, this means that — once again — I was wrong.
Shorts have been after Shopify for over two years. That’s when short-seller Citron Research’s Andrew Left published a report — which I highlighted — calling it a glorified affiliate marketing scheme. Left pointed to “promoters” like Keder Cormier, and the company’s own affiliate program.
Since then, however, Shopify has gotten some real merchants on its platform. Two prime examples are fitness company Gymshark and shoe company Allbirds. The company offers a complete e-commerce solution starting at $29 per month, but costs quickly escalate when merchants start buying add-ons.
Nonetheless, Shopify benefits from the Amazon backlash. Statements from people like Scott Galloway, claiming Amazon partners with companies like a virus on a host, drive smaller merchants to Shopify. This is despite the fact that more than half of Amazon’s product sales are on behalf of third parties.
The Bottom Line on Shopify Stock
You probably shouldn’t listen to a word I say about Shopify stock because I have been consistently wrong about it.
However, I continue to see this area of the market as a bubble, just as I saw what happened in 1999 as a bubble. Comparing Shopify to Amazon is like comparing a virus to an elephant — more specifically, a coronavirus. At some point, this will become apparent to investors. But I can’t predict when or how the market will turn.
For now, please enjoy your laughter at my expense. I’m going to cash out some of my Amazon shares; A profit’s not a profit until the cash is in your pocket.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.