Wall Street was hammered last week, resulting in the worst week for stocks since 2008, as Covid-19 dominates headlines. While the Federal Reserve’s stimulus measures this morning have buoyed stocks, coronavirus worries continue to linger. The selling has been mostly indiscriminate, including bonafide stocks such as Shopify (NASDAQ:SHOP), which has been crushed from its 52-week high.
First, we must acknowledge that while Shopify stock is a great long-term growth story, it can go lower. In fact, it’s possible for shares to go much lower.
Second, this stock showed waning momentum before the virus began hammering the market.
Clues Along the Way
Shopify stock topped out on Feb. 12 at $593.89. The rally came on better-than-expected quarterly results. Even though shares were up tremendously, the company’s earnings report gave bulls enough ammo to bid shares higher.
Coming into that report, Shopify was already up 75% from its fourth-quarter lows. It was a tremendous rally that left shorts frustrated beyond belief. However, the stock offered some clues that momentum was waning. Despite tagging highs north of $590, Shopify stock closed at “just” $531.25 in the same session.
Shares chopped sideways for a few more days, which suggested that, while bulls were able to take it higher after earnings, they didn’t have the strength to maintain those gains. So when the market rolled over about a week later — topping on Feb. 19 — it was no surprise that Shopify stock fell with it. Shares are now down a little more than 40% from the highs.
For long-term bulls, that decline is an opportunity.
Long-Term Themes Still in Play
The long-term theme for Shopify is simple: E-commerce. As long as e-commerce continues to make up a larger and larger portion of the overall retail pie, companies thriving in this long-term secular trend will continue to benefit.
That’s the short version. The long version is a bit more nuanced.
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Friends, when we think of online retail, our thought automatically goes to the king that is Amazon (NASDAQ:AMZN).
This company is a juggernaut and without a coronavirus-inspired selloff, this stud would still sport a market cap north of $1 trillion. However, Amazon is not the end-all, be-all solution.
In fact, not even close.
The company dominates way too much of e-commerce, and way too much of the customer experience. It doesn’t matter if the company is a tiny little at-home studio or Johnson & Johnson (NYSE:JNJ). You’d think a $300 billion market cap company would have some pull about what products are displayed next to its Tylenol or Band-Aid products, right? You’d think they’d have some info on its potential customers, right?
No — that belongs to The King.
That’s what Shopify is disrupting. Customers can be doing $1 billion in sales like Kylie Jenner or they can have revenue of $1,000 a month. It doesn’t matter. Shopify has a solution for all of its customers, big and small. It’s the backbone, but otherwise lets the customer control the experience.
Here’s the thing, though. Shopify is becoming the e-commerce ecosystem for the millions of people looking to move their operations online. Shopify has services in setting up online shops, payment options and is expanding its two-day shipping warehouse network. That last one is a biggie, as it can alleviate sellers’ biggest obstacle, which is shipping and handling.
In short, Shopify stock is a serious disruptor.
Bottom Line on Shopify Stock
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Unfortunately for investors, disruptors don’t come cheap. Analysts expect $2.16 billion in sales this year. With the coronavirus impact, who knows if that figure is even close to accurate.
One could certainly make a case that the outbreak of Covid-19 will drive even more shoppers online than we’re already seeing. Of course, the flip side is that, a deterioration in the economy will not bode well for retail, whether they are in a physical location or online. That would negatively impact Shopify stock.
But in any regard, let’s just use $2.16 billion for our base case, because one year of revenue isn’t our focus in this case anyway. If achieved, it would represent 36.7% year-over-year growth and value Shopify at 18.5 times 2020 sales. That’s certainly much cheaper than a month ago, but it’s still not cheap.
Remember though, we can’t value non-traditional companies by traditional measures. If long-term investors can scoop up Shopify below $300 a share, they may be wise to buy and hold this one. I don’t know how long it will take, but $500-plus seems like a reasonable reality down the road, as Shopify stock remains one of, if not the best way to play e-commerce.
Sub-$300 would give Shopify a market cap of $34 billion. This is a $100 billion market cap or more in 10 years.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
