Shopify: The Next Leg up for My Biggest Mistake

I was finally right about Shopify (NYSE:SHOP). But the joke’s on me. Years after I told readers to avoid Shopify stock, it finally fell. Unfortunately, that was from an all-time high of $1,463 a share, reached in February. The low was hit in mid-May, at $1,100. Now SHOP stock’s exploding upward again, closing June 8 at $1,230.74. That’s a market cap of over $152 billion on expected 2021 revenue of $3.5 billion.

There Are Still so Many Problems With Shopify Stock
Source: Paul McKinnon / Shutterstock.com

Why are people once again paying over 40 times revenue for Shopify stock? Credit goes to Alphabet (NASDAQ:GOOGL), the artists best known as Google, who announced an alliance with Shopify when it was near the lows.

Google now says it wants to “democratize” e-commerce. That is, Google wants to get it out of the hands of Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT). It’s doing this by giving Shopify’s 1.17 million merchants easier access to Google’s own shopping site, along with properties like Maps and YouTube.

This means my neighbor at The Bitter Southerner, an online magazine, gets more visibility for a web store selling books, posters and t-shirts. It means, in theory, I can start doing e-commerce from my Substack newsletter, once I have anything to sell.

Small merchants have been driving enormous growth. In its first quarter report, Shopify announced revenue was up 110% over last year. Adjusted net income was $254 million, $2.01 per share, 10 times higher than last year. The release came out on April 28, while Shopify stock was heading down.

Even if Shopify’s merchants can’t knock off the big boys, they can still share more of a market that will be worth $4.89 trillion this year. Google’s head of Commerce and Payments, Bill Ready, formerly with Paypal (NASDAQ:PYPL), killed a fee Google was charging merchants for listings. He quickly saw listings jump 80%. Shopify is also deepening its relationship with Google Cloud.

What SHOP Stock Says to Chartists

To chartists, the Google deal means SHOP stock is ready to resume its advance, mounting an assault on that all-time high.

Shopify remains under the control of its founders. This is thanks to a dual-share voting structure giving their shares the company’s voting rights. This kept Walmart from making a move on it during the COVID pandemic. It kept Google from taking advantage of mental health issues recently acknowledged by president Harley Finkelstein. It meant chairman Tobias Lutke, known as Tobi the Tornado, can keep harassing employees and consultants with impunity.

Growth will depend on the Shopify Fulfillment Network (SFN). This competes with Amazon, Squarespace (NYSE:SQSP), Square (NYSE:SQ) and companies like privately held Big Commerce. They even compete for Shopify merchants, handling back-office operations and getting merchandise to customers. Shopify launched SFN in 2019 and has since been adding new features. Some say this has made it a serious competitor to Amazon and players like eBay (NASDAQ:EBAY).

The Bottom Line

Shopify’s quarter justified the past faith of Shopify stock buyers. SFN and the alliance with Google should keep growth going. An alliance with Sweet, a platform for selling NFTs, may sweeten things further.

But Shopify now faces big competition on every front. It faces big company problems, scaling to meet demand amid that competition. It faces its own stratospheric valuation.

Shopify is also going through management turnover. This is partly because it has created many mini-moguls, partly due to the aforementioned Tobi the Tornado’s rough handling.

These are growing pains. None are, by themselves, a reason to sell Shopify. But it seems many did just that early this year, taking money off the table, turning it into cash in the pocket. This was wise.

I’ve been so wrong for so long on Shopify I hesitate to make any recommendation. If you ignored my advice and hung in, you doubtless think I’m stupid. I’ll take the “L”. Just remember that this company is playing in a higher league than before and be ready for it.

On the date of publication, Dana Blankenhorn held LONG positions in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.


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