Shopify (NYSE:SHOP) has stalled out. Indeed, since July 2, Shopify stock has gained less than 4%.
Certainly, the stock may have needed a breather. Bear in mind that Shopify went public in May 2015 at a price of just $17. The July 2 close came the day after SHOP broke $1,000 for the first time. Incredibly, Shopify stock has gained over 6,200% in less than five and a half years.
Some investors may see that enormous rally as a sign that even the best possible news is priced in, but in reality Shopify stock simply is one of the best growth stories in the entire market. And there are three reasons why recent trading is just a temporary pause before Shopify reaches new highs again.
The Post-Pandemic Tailwind
E-commerce names have been among the biggest winners in the market’s rally off March lows. Shopify stock, of course, has been no exception, gaining 278% off its lowest 2020 print.
But of late Shopify stock has slowed even as many similar names haven’t. That relative underperformance to at least a few peers doesn’t seem to make sense. And it should reverse.
After all, the novel coronavirus pandemic provides a huge boost to e-commerce in general, and Shopify users in particular. That tailwind doesn’t end when normalcy returns. Customer behavior has changed, and likely permanently. Online retailers already were taking market share from their brick-and-mortar counterparts, and that trend will only accelerate.
There’s a second, less covered, tailwind for Shopify. Many of the company’s customers are small businesses. And small businesses are popping up at a fast pace. Data from the U.S. Census Bureau shows a sharp spike in new business formations.
That’s perhaps not as surprising as it seems at first glance. More Americans are unemployed. Many are stuck at home at the same time. Starting a small business is, in its own way, less risky now that it might be in better times.
Obviously, not all of those new businesses are going to become Shopify customers. But surely some will. Shopify is perfect for home-based businesses. Its platform essentially is a way to democratize scale. It allows a business of almost any size to compete on a nearly even playing field with the world’s largest companies.
And so there’s a brand-new cohort of users who can drive incremental growth in 2021 and beyond.
Earnings on the Way
Before we get to 2021, however, there’s still one more earnings report for 2020 to get to. Shopify releases its third quarter numbers next Thursday.
History strongly suggests the report will be another blowout. Shopify has missed Wall Street estimates just once since going public. That ‘miss’ actually occurred only because of a one-time tax provision.
Given the ongoing tailwinds, there’s no reason to believe next week’s report will be any different. Expect a “beat and raise” quarter, with Shopify topping expectations and raising full-year guidance.
After all, that was the typical Shopify quarter before the pandemic struck. Why, exactly, should this quarter be any different?
It won’t be. More shoppers and more businesses should drive big growth in Q3. That in turn should be enough to drive Shopify stock higher after earnings.
The Shopify Stock Chart
Skeptics might retort that even a “beat and raise” quarter is priced in. It bears repeating: SHOP has rallied more than 6,000% in a little over five years. To some investors, that alone suggests the stock is due for a pullback.
But as I’ve argued many times before, big rallies don’t mean a stock has to pull back. In an economy with so many pending megatrends, companies that prove they can capitalize on those trends will see their stocks rally and keep rallying.
Obviously, SHOP is a perfect example. No shortage of investors thought it was “too expensive” at $400 or had run too far at $600. It kept going.
Now the chart suggests another leg in the rally. SHOP has challenged resistance above $1,000 three times. It’s faltered each time.
That won’t last forever. It likely won’t last long after earnings. Once SHOP breaks through that resistance, the technicals suggest a breakout is at hand.
Put another way, SHOP has just taken a breather. It won’t last much longer.
On the date of publication, the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
