By late February, the Shopify (NYSE:SHOP) bull run was at full speed. It seemed like nothing could go wrong.
But of course, things would turn bearish very quickly. With the impact of the coronavirus, Shopify stock has gone from nearly $600 to $351.
Yet if you had purchased the shares a year ago there would still be an impressive gain of 86% or so. In fact, over the past three years, the average annual return was 83%.
So what now? Could this be the time to pick up some shares? Or is it just too soon for that.
A Closer Look at Shopify Stock
Well, let’s first take a look at the most recent earnings report. Revenues jumped by 47% to $505.2 million and the net income came to about $800,000 or $0.01 per share.
The company was also aggressive in bolstering the platform:
- There were 13 more additional native language capabilities. Keep in mind that – by the end of 2019 – 29% of merchants were outside company’s core geographies.
- Shopify included selling with multiple currencies.
- The company added chat, order editing, and native rich media (like video and 3D).
But perhaps the most important effort was the creation of the Shopify Fulfillment Network, which allows merchants to leverage warehouses and sophisticated data analytics to ship products. A key part of this was the acquisition of 6 River Systems.
However, given the wide-scale disruption from COVID-19, can Shopify keep up its growth ramp? Well, the company has announced that the revenues and adjusted operating income should at least meet its own expectations for the first quarter. But as for Q2, there is little clarity.
As a result, Shopify has suspended its guidance for 2020 (the company will report its quarterly results on May 6).
There are some silver linings. Let’s face it, many business owners have lots of incentive to go digital. According to data from Rakuten Intelligence, the US saw eCommerce sales rise by 24% from March 1 to 17.
Although, for the most part, the bulk of the spending was on sites from Amazon (NASDAQ:AMZN), Target (NYSE:TGT) and Walmart (NYSE:WMT). Much of the shopping, of course, has been for essential items like house supplies (especially toilet paper!) and food.
In other words, the eCommerce surge may be somewhat muted for Shopify. But there are also some other issues to consider.
The majority or the revenues for Shopify come from small and medium-size businesses (SMBs). But this could certainly pose substantial risk.
Just look at Shopify’s 10-K filing:
“SMBs and entrepreneurs may be disproportionately affected by economic downturns, especially if they sell discretionary goods. SMBs and entrepreneurs frequently have limited budgets and may choose to allocate their spending to items other than our platform, especially in times of economic uncertainty or recessions. Economic downturns may also adversely impact retail sales, which could result in merchants who use our platform going out of business or deciding to stop using our services in order to conserve cash.”
Now the federal stimulus bill will help, but there will still likely be a large number of business owners who will throw in the towel. Besides, even for those customers who use Shopify’s POS system, the transaction revenues will also likely decline substantially.
Next, the company has risk for its small business lending program. The financing is based on accounts receivables. But if these dry up, the loans could sustain losses.
Consider that this business has been a growth driver for the company. In the fourth quarter, there was a 61% increase in merchant cash advances and loans to $115.9 million.
Bottom Line on Shopify Stock
Shopify does have a key advantage: it has $2.46 billion in the bank. Thus, the company does have considerable staying power.
But the fact remains that – even with the sharp drop in Shopify stock – the valuation is still far from cheap, with the shares trading at 30 times sales. And given that there is a significant risk to the top-line growth, the bear move may be far from over.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.