Watch This Indicator Before Deciding on Shopify Shares

As novel coronavirus cases soar to ungodly heights, one cannot help but feel incredibly pessimistic about the near-term outlook. Say what you want, you can’t have a vibrant economy with hospitals stuffed to the hilt with pandemic patients. But not all companies are feeling the heat. Take Shopify (NYSE:SHOP). After a robust earnings report, the e-commerce platform pulled out record holiday sales, apparently justifying the rich premium of Shopify stock.

Shopify (SHOP) logo on an app on someone's smartphone.
Source: Jirapong Manustrong / Shutterstock.com

Indeed, it’s truly an unenviable task to find holes in SHOP’s bullish narrative. On Black Friday and Cyber Monday, the burgeoning e-commerce player generated $5.1 billion in sales. Over the same period in 2019, the company rang up $2.9 billion, representing a 76% year-over-year lift. Harley Finkelstein, president of Shopify, described this as a “transformative year for commerce globally,” and that’s not surprising due to e-commerce’s presence widening:

More than 44 million shoppers worldwide bought merchandise from Shopify’s independent and direct-to-consumer (D2C) brands, a 50 percent increase over last year, the release stated. People spent an average of $93 per order in the U.S.; shoppers in Japan spent $106; Australia, $106; and Canada, $103. Cities logging the most sales were New York, Los Angeles and London. Countries with top sales were the U.S., U.K. and Canada.

Moreover, these results followed the company’s impressive third-quarter earnings report, which saw SHOP deliver total revenue of $767.4 million, up 96% over the year-ago quarter. Further, gross merchandise volume was $30.9 billion, up 109% from Q3 2019.

Clearly, SHOP has been the go-to platform for pandemic shopping, providing confidence that Shopify stock at four digits can be trusted.

Thus, in a counterintuitive manner, rising cases of the coronavirus could be a benefit to the e-commerce firm. With powerhouse states like California imposing restrictive measures, brick-and-mortar shopping is dead. However, the online format gets a free organic marketing opportunity, which should be a net positive for Shopify stock.

Still, I can’t get some nagging doubts out of my head, which I’ll share next.

Will Consumer Fundamentals Catch Shopify Stock?

I know it’s an uncomfortable topic, but I genuinely believe it’s one that we need to explore more often. According to ABC News, tentative evidence exists that myriad personal crises – suicides, overdoses and domestic abuse – are rising during the Covid-19 catastrophe.

Thus, I’m not completely gung-ho on Shopify stock, first as a matter of common sense. If we had a genuine bull market, if Americans had something to look forward to, these terrible circumstances would not become increasingly prevalent.

More pointedly for e-commerce plays, the added pressure to the global community (both emotionally and economically) will likely impact consumption behaviors. Indeed, that’s what we’re already witnessing in the U.S.

Prior to the pandemic, Shopify stock shared a 91% correlation coefficient with the personal consumption expenditures (PCE) index, which represents the “value of the goods and services purchased by, or on the behalf of, U.S. residents.” And I’m sure you’ll agree, this is no spurious correlation – a rising SHOP price should correspond with increased consumption.

But what would you do if consumption decreased, yet the Shopify stock price continued to increase? What if shares doubled while consumers increasingly tightened the reins on their wallets? Would you still be optimistic about SHOP’s chances?

SHOP stock vs. Personal consumption expenditures index
Click to Enlarge
Source: Chart by Josh Enomoto

I don’t want to heap more pressure on people in an already stressful environment. However, the question is not theoretical. From January through October of this year, the correlation between SHOP and the PCE index dropped to less than 10%; in other words, the correlation is gone.

Further, the reason why the direct relationship between the two metrics broke off was this. Between February and October, Shopify stock virtually doubled. But during the same period, the PCE index declined nearly 2%.

To be fair, the holiday sales were wildly strong. Nevertheless, much of that could be due to pent-up demand. My concern is not necessarily about gift-giving enthusiasm but rather, what happens post new year’s?

Watch Consumer Data Like a Hawk

Given that Shopify stock is my Achilles’ heel, you should carefully assess what other analysts have to say about SHOP. At this point, I’m just here to bring you some facts, while connecting the dots to help guide your decision-making process.

But if I had to guess, I’d say there’s a good chance that we could see volatility over the next three or four months. No, I’m not implying a crisis scenario for SHOP. Instead, if you’re thinking about buying shares, you may want to wait for a discount.

For those that really want to place a big wager on SHOP stock, I will point you to consumer data. Watch them like a hawk. Because somewhere down the line, the fundamentals will matter.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.


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