Undoubtedly, one of the biggest surprises of this year is Shopify (NYSE:SHOP). At a time when the discretionary retail segment has been gutted, the online merchant platform has defied all expectations. If positive momentum continues, Shopify stock will soon double in value on a year-to-date basis. Even factoring in that its online business caters fortuitously well to the shutdowns imposed by the novel coronavirus, SHOP is an extreme anomaly.
However, some fundamental justification exists for its tremendous surge. Primarily, the company delivered a blisteringly positive first-quarter earnings report, especially considering the broader context. Heading into the disclosure, covering analysts expected SHOP to produce an earnings loss of 18 cents per share. Instead, it delivered an earnings per share of 19 cents, obliterating the consensus target.
Additionally, SHOP generated revenue of $470 million, up 47% from the year-ago quarter. This also beat analysts’ expectations, which called for $443.2 million.
Even more impressive, though, was gross merchandise volume from merchant customers, which increased 46% to $17.4 billion. This beat the consensus target of $16.83 billion by a wide margin. In particular, GMV of apparel and accessories normalized by April following softness in mid-March. Not surprisingly, Shopify stock skyrocketed on the announcement.
However, a growing chorus of analysts are expressing skepticism toward SHOP’s upside potential. With valuations at nosebleed levels, it seems almost foolish to buy Shopify stock now. Moreover, so many investments are trading at rock-bottom prices.
Plus, it’s important to contrast Shopify’s Q1 results with recent results from Target (NYSE:TGT). The big-box retailer saw a huge spike in groceries (as you would expect) but a decline in discretionary items.
Can you still trust Shopify stock? Sort of.
Shopify Stock Makes Sense for Now
I understand the common argument against SHOP. Recently, the Department of Labor revealed that 3.2 million workers filed for unemployment benefits for the week ending May 2. Over the course of seven weeks, the number of initial jobless claims filed has totaled over 33 million.
If that wasn’t scary enough, every indicator is screaming that the labor market has suffered cataclysmic damage. Automatic Data Processing (NASDAQ:ADP) reported that the private sector shed more than 20 million jobs in April. Therefore, the very idea of people buying anything other than food, water, and other essentials seems absurd.
More to the point, Shopify’s reported increases in GMV for apparel and accessories runs counter to both intuition and hard economic data.
Yet to understand the seemingly discordant rise of Shopify stock, you must ask a difficult question: who does the coronavirus impact the most?
Logically, most of the nominal job losses have come from more easily replaceable, low-income positions. Further, the Pew Research Center disclosed that Covid-19 has disproportionately impacted communities of color, specifically Hispanics and African Americans.
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When you look at the trends, they’re jarring. Between March and April, the percentage of Hispanics that reported they or someone in their household suffered a job or wage loss increased 49% to 61%. For African Americans, the metric increased from 36% to 44%.
So, what does this have to do with Shopify stock? Everything, as I’ll explain below.
SHOP Is an Economic Barometer
According to the Dallas Morning News, race in America still matters. In a blunt but relevant discussion, journalist Mitchell Schnurman argues that white workers still get more of the good jobs. As an aside, I find it remarkable that this article was written in January of this year. In my opinion, Schnurman really got the essence of why Shopify stock is so hot today.
Having established that white workers typically tend to be higher-paid employees than their non-white counterparts, it’s only logical that Shopify has yet to be fully impacted by the coronavirus. According to a 2015 survey by ThinkNow Research, on average, white consumers spent the most money online of all races/ethnicities.
As Schnurman would likely say, they can afford it. Since the initial wave of job losses impacted low-income jobs, white workers have been relatively insulated. Thus, many apparently got through this period of quarantining with retail therapy, thereby bolstering Shopify stock.
Is SHOP a buy then? Absolutely not! Because at some point, you got to figure that the coronavirus impact will soon hit high-paying positions, which largely affect white workers.
According to the New York Times’ contributors Patricia Cohen and Tiffany Hsu, that might be already happening. As they worryingly wrote:
While restaurant, travel, hospitality and retail workers were among the first to lose their jobs, layoffs have become more widespread in recent weeks, affecting engineers at Uber, advertising account executives at Omnicom, designers at Airbnb and other office employees.
Therefore, I fully expect the Hispanic and African American job loss rate to decline moving forward, with the proportion of impacted white workers increasing. How Shopify responds to the gradual loss of white consumers will be the real test of its resilience.
Fundamentals Will Soon Make Sense
For those who are screaming that Shopify stock doesn’t make fundamental sense, I hear you. Eventually, SHOP will reflect whatever is the true health of the underlying economy. If high-paying jobs remain largely unaffected by Covid-19, then shares deserve their rich valuation.
But I doubt it. We can’t have an economy where only the well-to-do have everything and everyone else has nothing. After all, big business has to sell their crap to somebody. When those somebodies no longer exist, that’s when you start having serious problems.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
