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Shopify Stock Has Consolidated Long Enough, It’s Time to Rally

Shopify (NASDAQ:SHOP) has generated a massive return for bulls this year. SHOP stock is up 165% in 2020 and 253% from the March lows. Did you miss the move? If not, congratulations. If so, don’t beat yourself up.

shopify logo sign on building facade
Source: Beyond The Scene / Shutterstock.com

For a quick reminder, we saw the fastest bear market in history, followed by the fastest rebound. On top of that, we had a global pandemic raging across the globe. 

This sent a missile into the bunker for some industries and loaded other industries onto a rocket bound for the moon. In other words, some businesses were set to suffer while others were set to cash in. 

Luckily for Shopify investors, it fell in the latter category. But in the thick of things, it was not easy to decipher. In April, when the rest of the market was rebounding, SHOP stock was sinking. Shares fell almost 24% from peak to trough in just three days and looked set to retest to the March lows. 

The decline came after management provided a business update. While it looked like a bullish update — it was — the market reacted bearishly to the news. Then suddenly, shares reversed higher, climbing 99% in just 13 trading sessions and more than 150% in just six weeks. 

So if you missed the move, don’t beat yourself up. These have been tough times. But let’s not forget about the future. 

Shopify Is an E-Commerce Disruptor

A chart of e-commerce in 2020.
Click to Enlarge
Source: Chart courtesy of Statista, Source from U.S. Census Bureau

Investors are making two mistakes when it comes to e-commerce, and specifically, when it comes to Shopify. 

First, they are focusing exclusively on the valuation. Admittedly, SHOP stock trades at a high valuation. We’ll dive into the numbers in a second, but on the surface it trades at 34 times next year’s revenue estimates. That’s lofty. 

Second, too many investors are looking at this year’s growth spurt as a one-time event. They’re also doing it for video conferencing, online document management, telehealth and e-commerce. Folks, these trends have been in place for years — Covid-19 simply accelerated what was already there

Surely growth will decelerate in the future, but that doesn’t mean Shopify will give back the growth it has garnered this year. Have a look at the chart above. That’s the percentage of retail sales that are generated from online sales. While this year’s spike is startling, notice that the long-term trend has been from the lower left to the upper right. 

For SHOP stock, analysts expect $2.84 billion in sales this year, $3.74 billion next year and more than $5.3 billion in 2022. Considering that Shopify hasn’t missed a revenue estimate since at least 2015, these numbers may even prove conservative. 

Maybe, just maybe, the stock justifies its premium valuation because it’s a premium company. It’s carving out an online niche with a deep moat that’s becoming impossible to compete with. 

Admittedly, Shopify makes money with its online storefront subscriptions. However, its other services — like Shopify Credit, Shopify Pay, Shopify Shipping and others — scale as its customers’ sales scale. 

If e-commerce trends are any indication, Shopify has a very lucrative future. 

Bottom Line on SHOP Stock

Daily chart of SHOP stock.
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Valuation is the biggest issue investors run into with this stock. The best answer for SHOP stock is this: The biggest winners of the past decade or two almost all had a high valuation. Valuation can give investors pause, but for those that took the plunge, they were awarded handsomely. 

With a market capitalization in excess of $120 billion, perhaps SHOP will still have its bumps in the road. But largely speaking, there is a major difference between buying a highly valued flash in the pan and a highly valued high-quality company. For Shopify, it is mostly certainly the latter and that’s the distinction we must look for when it comes to valuation. 

That brings me to the stock price. 

Shares of SHOP stock recently pushed through downtrend resistance (blue line), but remain largely stuck in a range. This has been the case since June, with shares bouncing between $1,100 resistance and $870 support. After breaking out over downtrend resistance, shares were recently rejected from range resistance on Dec. 3.

However, the stock is far from being in “breakdown mode,” as it hovers above all of its key moving averages. From here, I’d love to see it hold $1,000 and give $1,100 another test. If SHOP stock can break out over this mark and clear its current all-time high near $1,147, it could open up more upside and give bulls a handsome reward.

The InvestorPlace Research Staff member primarily responsible for this article held a long position in SHOP. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/shop-stock-has-consolidated-long-enough-its-time-to-rally/.

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