I’ll be honest: I’m not sure what investors possibly could have expected from Shopify (NYSE:SHOP) earnings last week. The e-commerce platform delivered a spectacular third quarter, yet Shopify stock still fell 14.6% in just three sessions into and out of the release.
It’s possible that broad market factors played a role. Impressive reports from other online and e-commerce names were met last week with a shrug, or worse. Even with major indices rallying Monday, markets look nervous. Shopify simply may have chosen the wrong week to report.
Whatever the cause, the selloff is misguided. SHOP offers one of the best growth stories in the market — and investors now get a better price. InvestorPlace Analyst Matt McCall wrote in June that long-term investors should be rooting for a dip in Shopify stock. Here it is.
What Else Do You Want?
Again, Shopify’s Q3 was spectacular. Across the board, the news looks nothing but positive.
On the top line, Shopify posted sizzling numbers. Revenue nearly doubled year-over-year. Gross Merchandise Volume, or the total amount of sales made by Shopify merchants, increased 109%.
Skeptics will argue that sales aren’t everything. They’re right. But below the top line, Shopify also delivered a strong quarter. Gross margins were flat year-over-year, but that’s not a bad thing. Merchant Solutions revenues (i.e., Shopify’s take on transactions) grew significantly faster than Subscription Solutions (i.e., fees). That shift in revenue composition should compress gross margins, yet Shopify kept those margins essentially intact.
At the operating line, we see the leverage in the business model, which helps explain why Shopify stock looks so “expensive.” Adjusted operating income rose 12.5x year over year. Not 12.5 percent, but 12.5 times.
A year ago, Shopify’s operating profit was 3% of sales. This year, the figure reached 17%. As a result, adjusted earnings per share went from a loss of 29 cents in Q3 2019 to a profit of $1.13 in Q3 2020.
Even the balance sheet is in great shape. Shopify closed the quarter with more than $6 billion in cash and just $750 million in convertible debt. To date, Shopify has grown organically. Its biggest acquisition was the $450 million buy of robotics company 6 River Systems last year. If it wants to go bigger on the M&A front, it certainly can.
Why Shopify Stock Fell
So why did investors sell the news on Shopify stock? Honestly, it’s somewhat difficult to tell.
Indeed, the market initially liked the report. SHOP stock was up more than 5% in pre-market trading on the day of the release. Over the course of the day, the trend reversed. SHOP closed down nearly 5% after a similar decline the day before. It added another 5%-plus on Friday, and it was down 1.6% on Monday.
That’s a total pullback of 16%. And I don’t see it. The numbers look solid, even beyond the fundamentals. For instance, in part due to the novel coronavirus pandemic, Shopify added a significant number of merchants. Many converted from trial periods to becoming paying users — which shows the attractiveness of the platform.
Competition essentially is nowhere to be found. And while Shopify didn’t give guidance for the fourth quarter or 2021, that’s not unexpected given the multiple uncertainties in the external environment.
It simply may be those uncertainties that are at play. The NASDAQ Composite declined 5.5% last week. Whether it’s the election, the lack of a second federal stimulus or something else, investors are nervous. They’re selling a lot of high-growth, high-multiple stocks — and Shopify qualifies on both fronts.
Technicals and the Long-Term Case
Of course, we’ve been here before. In fact, since late June, Shopify stock has been stuck in a range.
Resistance has held, and relatively fiercely, right around $1,100. Four times, SHOP has hit that level. Each time, it ha pulled back rather sharply — including over the last couple of weeks.
That said, support has held just as well, around $900 — just below the current Shopify stock price.
As McCall noted in June, SHOP has seen these periods of consolidation before. Each time, it eventually broke through resistance, and broke out to the upside.
I don’t believe this time will be any different. The long-term case here is too powerful. E-commerce adoption already was accelerating, and now is even faster thanks to the effects of the pandemic. Shopify’s business model, which goes far beyond simple websites, literally is upending the business world. It brings the power of scale — in payments, sales, fulfillment and more — to even the smallest companies.
The reason that Shopify stock has been such a huge winner since its 2015 initial public offering is that investors see the power of that long-term case. On occasion, however, short-term fears have led investors to get nervous, and even to panic.
Each of those short-term moves, so far, has created a buying opportunity that led to upside for patient investors willing to ride out the volatility. This selloff will be no different.
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article.
