Should You Buy Shopify Stock Ahead of Its 10-for-1 Stock Split?

  • Shopify (SHOP) has suffered mightily, falling nearly 80% from the 2021 high.
  • The stock will undergo a 10-for-1 stock split at the end of the month.
  • The business has been disrupted, but at some point, an 80% correction accounts for the shortcomings.
  • The charts show a reasonable risk/reward setup for bulls.
SHOP stock - Should You Buy Shopify Stock Ahead of Its 10-for-1 Stock Split?

Source: Burdun Iliya / Shutterstock.com

Growth stocks have traded much differently than the rest of the market. Rewind to seven or eight months ago to the fourth quarter of 2021. Some growth stocks were in the throes of a bear market, down 40% or so. Others, like Shopify (NYSE:SHOP) were hitting all-time highs. Investors who were long SHOP stock weren’t too worried about what was in store, because the stock was booming to new highs.

In hindsight, the divergence in growth stocks — some soaring while many were cratering — should’ve been a big red flag. The second big red flag came on January 4, the second trading session of 2022. On that day, the S&P 500 hit an all-time high. The Dow hit its high a day later.

However, on that date the Russell 2000 and Nasdaq were down 7% and 2.2% from the highs they made in November 2021, respectively. In other works, “risk-off” indices were leading and “risk-on” assets were lagging.

By the time January came around, Shopify was already on the brink of a technical bear market, down 19.6%. Since then, it’s only gotten worse.

Despite being down just 2.7% so far in June, SHOP stock is setting up for its seventh straight monthly decline. Amid that stretch, shares have fallen 21%. The question now is, should investors buy it?

Well, let’s dive in and take a closer look to find out.

Ticker Company Name Current Price
SHOP Shopify $373.21

Upcoming Stock Split for SHOP Stock

It shouldn’t act as a catalyst, but stock splits often do result in bullish price action. According to Bank of America: “Stocks that have split gained on average 25% over the next 12 months compared with a gain of 9% for the benchmark index.”

In this case though, SHOP stock is either likely to drastically outperform the overall market over the next year, or drastically underperform it and it likely has little to do with the stock split. Instead, it will likely rely on how growth stocks perform as a group.

In any regard, the company is planning a 10-for-1 stock split for the end of June. At current prices, it will take Shopify from roughly $373 down to $37.20. Of course, shareholders will receive 10 shares for each share they own, so the end result will be the same. However, we can’t deny that stock splits do seem to help the share price as it ultimately increases demand for the stock.

For instance, once a bull market comes along, it seems easier to go from the mid-$30s back to $100, than it does to go from the mid-$300s back to $1,000. For the bulls sake, that’s the hope.

Breaking Down Shopify

On the way up — when shares rallied from roughly $300 at the Covid low to more than $1,750 at the high — the valuation didn’t seem to matter. SHOP stock was trading at 30 to 40 times revenue. Reasonable growth investors argued that a price-to-sales ratio (P/S) wasn’t appropriate and instead, a price-earnings ratio (P/E) should be used, but that was quite high too.

There was no way to cut it: Shopify was expensive.

But how much water does that really hold? Salesforce (NYSE:CRM) has been an expensive stock for more than 10 years. Amazon (NASDAQ:AMZN) was too. Virtually all of the biggest winners in tech have been expensive at one point or another. So to some degree, picking the big winners comes with swallowing a big valuation.

That said, when a bear market comes around, these are the stocks that will pay the price — and SHOP stock has. On the plus side, it still has solid growth expectations.

Growth Estimates Are Strong

Analysts expect about 26% revenue growth this year to $5.8 billion. However, in 2023 through 2025 — so three fiscal years —  consensus estimates call for roughly 20%-30% growth per year. If achieved, Shopify will generate almost $13 billion in sales by year-end 2025.

For those wondering, estimates are also generous on the earnings front. Estimates call for just under $1 per share in profit this year, followed by nearly $2 per share in 2023 for 100% growth. In 2024, expectations sit at $3.74 per share followed by massive growth to more than $7 per share in 2025.

Now, there are a few caveats. The first is that these are just estimates and are susceptible to huge changes, particularly the further out we go in time. Second, the valuation is still quite high on a P/E basis. Although on a P/S basis, we’re talking about roughly 7 times this year’s sales. That’s not bad.

Shopify is still a growth stock, which comes with its own pros and cons. The pro is that it has a long runway for growth. The con is that it has a high valuation and notable swings in its business. Cash flow can vary wildly from quarter to quarter, as can profitability and margins. Debt has been creeping higher too.

So while the business is strong, there are questions and we’re seeing those “questions” arise in the form of a selloff.

Sizing Up SHOP Stock

Weekly chart of SHOP stock
Click to Enlarge
Source: Chart courtesy of TrendSpider

Is Shopify perfect? No, far from it. But it does have a potentially landscape-altering e-commerce platform with plenty of potential for growth and profitability. And at some point, an 80%-plus decline accounts for all or a majority of its shortcomings.

When I look at the chart, I see a notable area of potential support in the $300 area. The 2020 low sits at $305.30, while the $300 zone was also a big support area in 2019. It has been so far this year too.

As it stands, this is a reasonable risk/reward area for buyers, as they can cut their losses should the stock lose this support zone.

On the upside, the declining 10-week moving average has been resistance. If SHOP stock can clear it, it could open the door to $500. Above $500 and some eventual longer-term targets may include $750 to $780, followed by $1000. Post-split, this will be $75 to $78, followed by $100.

On the date of publication, Bret Kenwell held a long position in SHOP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


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