There are three kinds of Shopify (NYSE:SHOP) investors. Those who bought Shopify stock in 2019 or earlier and are sitting on significant unrealized profits. Those that bought at or near its 52-week high of $593.89 and are losing money on their bets. And, finally, some were courageous enough to buy in mid-March when it dropped as low as $322.
Which are you?
The Buy-and-Hold Variety
The investor who bought Shopify stock in 2019 or earlier and is still holding is a person who believed in CEO and founder Tobi Lutke’s vision to help entrepreneurs launch their e-commerce businesses through the use of Shopify’s e-commerce platform.
In May 2017, I recommended SHOP as one of 10 growth stocks to buy. At the time, it was trading at $86. “Shopify doesn’t make money, but that’s OK, because it’s too busy scaling the business to worry about profitability,” I wrote at the time. “Normally, that’s a deal-breaker for me, but when you’re growing revenue at 75% a quarter while capturing market share, it’s OK to toss aside your investing rules.”
Don’t get me wrong. I rarely make an exception about profitability. I can count on both hands the number of companies I’ve recommended in recent years that were losing money. Shopify is one of them.
You Bought Shopify at Its 52-Week High
We’ve all done it. We’ve gotten so excited about buying the greatest thing since sliced bread that we’ve thrown caution to the wind.
As I said earlier, Shopify hit a 52-week high of $593.89 on Feb. 12. That was, not coincidentally, the same day it delivered excellent fourth-quarter earnings. Not only did it report earnings per share of 43 cents in Q4 2019, 79% higher than the analyst estimate of 24 cents, but it also reported quarterly sales of $505.2 million, 47% higher than in the same period a year earlier.
“Total revenue accelerated for the first time since Q4 2015,” SunTrust Robinson Humphrey analyst Terry Tillman wrote Feb. 12. “Management highlighted that Shopify now has 1.1 million merchants on the platform, up from over 800,000 earlier in 2019, and is now the second largest e-commerce retailer in the U.S.”
Also, the company’s gross merchandise volume increased by 47% in the fourth quarter, 400 basis points higher than analyst expectations. Shopify estimated that its 2020 sales would be between $2.13 billion and $2.16 billion, also higher than the consensus.
Everything was looking up for Shopify and then the novel coronavirus took hold in the first two weeks of March, knocking its stock down to $322, leaving a lot of momentum investors crying in their beer.
Timing the Bottom
This last group of investors is luckier than they are good. To buy Shopify stock in mid-March, after it had dropped 46% from its 52-week high in mid-February and the S&P 500 was still heading lower, were bets made by brilliant people or fortunate people.
Since most experts agree you can get burned trying to market time a bottom, I believe these mid-March buyers are the latter. However, a gain is a gain. Congratulations on your fortuitous timing.
That said, it appears that the pain suffered by investors so far in 2020 is not over. Not by a long shot.
“The S&P 500 is currently trading at a forward P/E ratio of 17.3, which is above its 5-year average of 16.7 and 10-year average of 15.0,” suggested MarketWatch contributor Cam Hui on April 14. “Moreover, we are entering first-quarter earnings season, and the ‘E’ in the forward P/E ratio is going to be revised substantially downwards.”
So, despite operating a platform that helps companies manage e-commerce businesses, Shopify pulled its 2020 guidance on April 2. That means it doesn’t know what the future holds, and its customers operate digitally.
Based on pulling its guidance, I wouldn’t be negative about Shopify, but the markets as a whole. Shopify stock may be revisiting the $300s at some point in 2020.
The Bottom Line on Shopify Stock
In early March, I argued that barring a global recession from the coronavirus, Shopify would be trading higher than $600 by New Year’s Eve.
While I still think that’s possible, Shopify’s May earnings release and conference call will fill in the blanks about what this entire mess means to its business over the remainder of the fiscal year. Once investors get a little more information about the situation, I think it will be easier for people to make up their minds about its short-term direction.
If you’re holding for 2-3 years, I think you can buy at these prices, but don’t be surprised if you get a cheaper entry point before and shortly after its May report.
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, he did not hold a position in any of the aforementioned securities.
