E-commerce solutions provider Shopify (NYSE:SHOP) is set to report first-quarter numbers before the bell on Wednesday, May 6. There are three important things Shopify stock investors need to consider heading into earnings:
- First quarter numbers will likely be outstanding, powered by a huge shift among small-to-medium sized merchants and retailers to online selling channels amid the novel coronavirus pandemic.
- Those outstanding numbers may not be good enough for a stock that has more that doubled over the past six weeks and rushed to all-time highs. Shopify stock could drop as the “hype trade” deflates.
- The stock is a long-term winner that you want to own for the long haul, at the right prices. If the stock drops back towards $550 after earnings, buy that dip.
Over all, I love Shopify stock long-term, and highly recommend all investors get exposure to this name. But, if you already have exposure, don’t chase this rally. Wait for a pullback. Similarly, if you don’t have exposure yet, wait for a pullback, too.
That pullback could come this week with the first quarter earnings report. So get your buying powder ready.
Shopify Earnings Will Be Strong
There’s little doubt that Shopify’s first quarter earnings report will be great.
Amid the coronavirus pandemic, physical business has shut down. That’s especially bad news for small merchants, among whom nearly 40% don’t have an online selling presence. Consequently, throughout February, March and April, small merchants have rushed to push product and services through online channels, many of them for the first time ever. This rush has likely: 1) brought new customers to Shopify, and 2) created a surge in shopping volume through Shopify’s websites.
Management has already confirmed as much. CTO Jean-Michel Lemieux said on Twitter (NYSE:TWTR) in mid-April that Shopify was “handling Black Friday level traffic every day.”
First quarter numbers will speak to this phenomenon. Sales will likely breeze past estimates. Profits should, too. And because the tailwind likely persisted in April and in early May, management will likely give a strong second quarter guide, too.
All in all, the numbers should be very good.
Maybe Not Strong Enough
Shopify’s earnings are always very good. Often, though, they aren’t good enough to support a post-earnings pop in the stock because shares are already fully priced heading into the print.
I’m afraid that “strong quarter, weak stock response” is exactly what we may get this time around.
It’s very easy to see that Shopify stock is already priced for a blockbuster quarter. The stock has more than doubled from its mid-March lows, surged to all-time highs, and trades at a rather insane 37-times forward sales multiple.
The stock is priced for perfection. But the company may not be deliver perfectly in the earnings report.
First quarter sales growth may underwhelm. The second quarter guide could come in light relative to hyped-up, buy-side expectations. Margins may not perform up to par.
There’s a lot that could go wrong in the earnings report. None of it is priced in. As such, I view it as fairly likely that the stock drops after earnings, even though those earnings will be really good.
Buy the Dip in Shopify Stock
If Shopify stock does drop after earnings, buy that dip.
Shopify is a long-term winner that is transforming into the backbone of modern commerce. That is, back in 2005, every merchant and retailer needed a physical storefront to push product. Today, every merchant and retailer needs an online storefront — or a website — to push product.
Shopify makes those websites. They are the best in the world at doing so. And about 40% of small businesses today don’t have an online storefront — implying huge growth potential for Shopify over the next decade.
That’s why the stock has rallied 3,700% from its 2015 IPO price. It’s also why this stock will keep rallying over the next five to ten years.
The only problem with Shopify’s stock is that, every once in a while, it tends to shoot into overbought and overvalued territory. That’s where we are today. Shares are overbought. Shares are overvalued.
But a post-earnings dip will eliminate those two problems. As such, if the stock does drop after earnings, buy the dip and ride shares higher over the long-term.
The Bottom Line on Shopify
Shopify stock is a long-term winner sprinting full steam ahead into an earnings report that will have a tough time living up to supercharged expectations. While I expect the numbers to be very good, they may not be good enough. The stock could drop in response. If it does, buy the dip.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SHOP.
