Should investors chase Canadian e-commerce company Shopify (NYSE:SHOP) stock at its current price of almost $750 per share?
That’s a big question that investors must address. The Ottawa-based company is looking to extend what has been a meteoric rally in its share price over the past three months. Since the market bottomed in March, SHOP stock has more than doubled.
Why? Brick-and-mortar retailers closed their doors and moved online, and Shopify saw the benefits. Since its 2015 IPO, the stock has returned a staggering 4,600% to investors. It’s now Canada’s largest publicly traded company. Its $65 billion market capitalization eclipses the value of even the northern nation’s biggest banks.
Investors who bought SHOP stock ahead of its current run are now giddy, but analysts are sounding the alarm on Shopify. They claim that shares are overpriced and the company is overvalued. One analyst has even called the current price “ludicrous.” Other analysts have called Shopify’s business model — where it offers online retailers payment, marketing, shipping and customer engagement tools — “unsustainable.”
Is the Party Over for SHOP Stock?
The novel coronavirus has brought about a ton of disruption, and SHOP stock has benefitted. However, it is not the only company expanding aggressively in the world of e-commerce.
Dominant players such as Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and Walmart (NYSE:WMT) have also been pushing for e-commerce growth, and new competitors are entering the space on an almost daily basis. Perhaps all e-commerce needed was lockdowns for it to become the primary means of retail shopping.
Will Shopify be able to stay at the front of the pack over the long term?
Shopify raised red flags when it announced first-quarter results in early May. The numbers beat expectations — and revenue grew nearly 50% year-over-year. However, the company’s announcement that merchants have been downgrading to lower-priced plans or altogether canceling subscriptions alarmed many analysts.
That makes sense. Many of the small and medium-sized businesses in Shopify’s customer base are likely struggling financially. Many may end up going out of business before 2020 is out, even as restrictions lift around the world. Such a scenario would no doubt force Shopify to reconsider its business model.
Shopify’s New Partnership With Facebook
Fortunately, Shopify is working to diversify its operations. On May 19, it announced a new venture with social media king Facebook (NASDAQ:FB) called Facebook Shops. This partnership will allow retail and consumer companies to sell products online through the Facebook platform.
Shopify gives Facebook an established and reliable e-commerce tool, while Facebook provides Shopify access to its 2.6 billion monthly active users. Facebook Shops will enable businesses to list their products for sale on their Facebook pages, Instagram profiles and through other advertisements.
In coming months, Facebook Shops will also allow businesses to sell products to customers directly through chat features on WhatsApp, Messenger and Instagram Direct.
How much will Shopify benefit from this tie-up? That remains to be seen. Shopify is not the only partner involved in Facebook Shops. Other platforms such as privately held BigCommerce are also involved. And Facebook CEO Mark Zuckerberg has said that Facebook sees the new Shops venture — which is free to use — primarily as a means to drive advertisement revenue.
While SHOP stock moved higher on the announcement, many investors are taking a wait-and-see approach. In time, we will see how Facebook Shops truly impacts Shopify.
The Bottom Line: Take Profits and Run
Given the lofty heights of Shopify’s stock price and the uncertainty surrounding its ability to maintain the current momentum, now would be a good time for investors to take profits and run. Keep in mind that Canada has a long history of producing tech darlings that flame out over time. Companies such as Nortel Networks and BlackBerry (NYSE:BB) enjoyed strong bull runs before collapsing under increased competition and a failure to adapt to a changing marketplace. Nortel Networks never emerged from bankruptcy protection and BlackBerry now trades as a penny stock.
Analysts seem to agree that investors should be wary of SHOP stock at its current price. Among 27 analysts offering 12-month price forecasts on Shopify, the median price target is $627, with a low estimate of $332 and a high price target near current levels at $860 per share. The median estimate represents a 16.4% decrease in SHOP stock from its current price. The majority of analysts have a hold rating on the stock, noting that results for the second quarter could prove to be a make-or-break moment for the share price.
Any way you look at it, SHOP stock is expensive at $750 per share. While Shopify has done a lot of things right in recent years and been quick to capitalize on the Covid-19 pandemic, it remains to be seen if the company referred to as a “baby Amazon” can live up to the hype surrounding it.
For now, investors would be wise to steer clear of SHOP stock. Wait for it to pull back to a more attractive per-share price before you buy.
As of this writing, Joel Baglole did not hold a position in any of the aforementioned securities.