A battle seems to be brewing over Shopify (NYSE:SHOP) and Shopify stock.
The e-commerce platform company has been on a wild ride the last five weeks that saw it push through $500 for the first time in its history, February 12, hitting an all-time high of $593.89. Thanks to the coronavirus-led correction, it then proceeded to fall back to $420.50 on the last trading day in February.
As I write this, it’s up more than $26 on the day, once again trading above $500. Those who bought close to $600 are likely hoping for a relatively quick resolution to the global health scare. While I don’t think this is likely, I do believe the stock’s latest move could be the beginning of Shopify’s next leg higher.
Shopify Stock Hits $600
How quickly it gets to $600 depends on the macro issues facing the global economy. However, the fact that a significant chunk of its customers is primarily online, that should reduce the economic headwinds it might face in the weeks and months ahead.
In mid-December, I wondered how long Shopify would take to get to $500. At the time, it was a few dollars under $400. I concluded it would do so by April. It managed to hit the target a month and a half early, a testament to the momentum train it’s currently riding.
In my piece, I suggested that investors who wanted to own the company’s stock, put half a position into SHOP, keeping the other half for when it corrects to $350. That was predicated on the rationale that the stock was expensive then, and it’s still expensive at 34 times sales.
In a perfect world, it would correct to $350, and you’d get your other half position filled. Unfortunately, it doesn’t appear that Shopify wants to cooperate.
Excellent Earnings and Guidance
On February 12, Shopify announced fourth-quarter results that saw revenues of $505.2 million, $23.2 million higher than the consensus, while its adjusted earnings per share were 43 cents, 19 cents better than expected. Not surprisingly, that was enough rocket fuel to propel Shopify stock to its all-time high just dollars from six bills.
Not only did Shopify have a blowout quarter, but its 2020 guidance was also very optimistic.
I don’t know if you’ve ever heard CEO Tobi Lutke speak. He’s not in the habit of hyperbole, so if it thinks it can deliver as much as $2.16 billion in revenue in 2020, I believe Shopify will meet that target.
The big question is how much profit it can drive to the bottom line while doing so. Secondarily, new entrants such as Elliot could steal some of Shopify’s thunder. You’ll notice I’ve said it could, rather than would.
On the profit front, Shopify’s guidance calls for a GAAP operating loss of at least $324 million in 2020. On an adjusted basis, it expects a small operating loss of breakeven to $20 million in the hole. Of course, those estimates were before the coronavirus started to take hold. With a sky-high valuation, it needs to have a strong second half of the year to make up for any financial setbacks in the first half.
On the competitive threat front, here’s what I said about the subject in late January:
“While you might think Amazon (NASDAQ:AMZN) is its biggest threat, I believe that investors ought to be equally concerned about upstarts like Elliot. That’s because if a guy like me can have an online store up in a single day, I’m sure they’re a lot of others who’re seriously considering this viable alternative,” I wrote January 29.
Now, don’t get the wrong impression. I’m very much sold on Shopify’s business and model for growth, but part of investing is anticipating everything that can go wrong, and building that into your projections. I’m not saying these upstarts are going to knock Shopify off its e-commerce perch, but they could make the stock’s push to a $100-billion market capitalization a slightly slower process.
The Bottom Line on Shopify’s Stock in 2020
Barring a global recession caused by the coronavirus, I don’t think there’s any question Shopify will be trading at $600 or higher by New Year’s Eve.
In the meantime, continue to expect lots of volatility on the road from $500 to $600.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.