Shopify Continues to Make All the Right Moves

Shopify (NYSE:SHOP) is slated to announce its first-quarter results on May 6. Trading above $600 and near its all-time high, Shopify stock hasn’t given its owners much to worry about leading up to its earnings. 

Doing All the Right Things Isn't Enough to Keep Driving Shopify Stock
Source: Beyond The Scene / Shutterstock.com

Analysts, on average, predict that its Q1 sales jumped 38% year-over-year to $443.7 million  while it lost 18 cents. Regardless of how the company did in Q1, the long-term prognosis for the company and its stock is very good. 

That’s because it continues to make all the right moves. 

Shopify’s New App Will Be a Winner

Management’s latest move was to launch a consumer-focused shopping app called Shop, which combines some of the features of Shop Pay and Arrive, to provide consumers with the ability to search for and buy from local businesses. 

During the novel coronavirus, the fate of local businesses has increasingly been on the minds of consumers. The launch of Shop suggests that Shopify’s understanding of consumers’ desires is right on target. It’s too early to know how big a contribution Shop will make to Shopify’s future earnings, but I think it will be a hit. 

“We are setting out to reimagine the online shopping experience for customers — to provide them greater convenience, transparency, and personalization. As a result of social distancing and stay-at-home measures, customers have become more reliant on online ordering than ever before as it becomes more challenging to stay connected to the brands they love,” stated Shopify’s press release

There’s no doubt that analysts are conflicted about Shopify’s current valuation. Trading at 45 times the company’s sales, SHOP stock is ten times as expensive on a relative basis as Amazon (NASDAQ:AMZN). The latter giant is one of the few companies in the world with a trillion-dollar market capitalization. 

Shopify Reported a Traffic Increase

In mid-April, Shopify’s chief technology officer, Jean-Michel Lemieux, tweeted that it was seeing a significant uptick in traffic on its platform as businesses try to compete in a Covid-19 environment that’s almost entirely made up of e-commerce sales. 

Baird analyst Colin Sebastian argued that this wasn’t as big a deal as investors might think.

“While we view the commentary and data positively, reinforcing our view of Shopify’s platform strength and the outperformance of e-commerce in the current environment, it’s important to note that traffic is only one variable in measuring volume,” Sebastian said in a note to clients. 

“We also assume ASPs {average selling prices} are lower as merchants broadly discount products, and many consumers may be doing more browsing than buying in discretionary product categories.”

Translation: Whatever gains Shopify’s getting in terms of volume is offset by lower prices, making the net increase a bit of a wash. 

However, National Bank analyst Richard Tse, who has an “outperform” rating on its stock and a $700 target price, believes the company’s new Shop app will help grow its gross merchandise volume (GMV) and increase its ad revenue from sponsored product categories and other features. 

“The app will allow merchants to access the mobile commerce market without having to build the tech on their own which can be cost prohibitive for {small and medium businesses.} This includes the cost to acquire mobile customers,” Tse wrote in a note to clients. 

“The app’s one-click pay feature may also help retailers increase their conversion rate as currently, mobile app conversion rates in the US are around 1.5 percent versus 4 percent from desktops.”

The Bottom Line on SHOP Stock

The last time I wrote about Shopify stock was in mid-April. At the time, I wondered if it would drop back to $350 where it traded in March or zoom ahead to $650. With the shares trading just under $500, I argued that, for investors looking to hold the stock for two or three years, it wouldn’t be a bad move to acquire some of its shares. 

However, I also said that investors could get “a cheaper entry point before and shortly after its May report.”

I first recommended SHOP stock in May 2017 when it was trading at less than $90. While it didn’t make money, I could see that it had a bright future. Whatever the company’s Q1 results show, it will still be the great company it’s always been. 

Like Tse, I see a bright future for Shopify. The launch of the Shop app just adds to the laundry list of reasons that Shopify is one of the shining stars in tech and e-commerce. 

As long as it continues to make all the right moves, SHOP stock will remain a long-term buy. 

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.

 

    

 

 


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