On May 2, Shopify Inc (NYSE:SHOP) beat on earnings per share and revenue expectations. In the ensuing sessions, Shopify stock climbed higher and higher, notching gains of $20 per share in its rally from $125 to $145.
However, SHOP stock wasn’t able to eclipse its previous highs near $155. The question now shifts to, can Shopify stock do it after a strong earnings result? Here are three reasons it’s possible and why SHOP can rally even higher.
Growth
Shopify provides cloud-based solutions for small- and medium-sized businesses. Its services range from social media to sales channels. In an economic environment like this and with the secular trends toward online exposure, this bodes well for the company.
In the most recent quarter, first quarter sales exploded 68% year-over-year (YOY), while earnings per share of four cents came in with a surprise swing to profitability and nine cents per share ahead of expectations. Although, I can’t help but to point out that, on a GAAP basis, earnings came in at a 16-cent-per-share loss. Operating losses also deepened from a year ago.
Most of this can be attributed to stock-based compensation.
Still, analysts have strong expectations for Shopify this year. Estimates call for 50.5% revenue growth in 2018 and 37% growth in 2019. This could be the make-or-break mark for Shopify though: Earnings growth.
Current estimates expect earnings of 11 cents per share this year, down from 16 cents per share last year. However, in 2019, expectations call for a five-fold increase to 55 cents per share.
If management can beat that mark, it could propel shares even higher. If not, momentum could wane. Although, it’s worth noting that investors are willing to overlook the bottom line in favor of the top line at this point. In that regard, Shopify is on target to hit the coveted $1 billion annual sales mark.
Execution and Expansion
Investors may also feel confident in Shopify stock as gross margins continue to expand. It’s not a huge expansion, but in the most recent quarter, gross margins came in at 58%, up 100 basis points YOY. This has been the case since January 2017.
Investors should also feel confident in management. After all, it has been fueling the company’s strong sales growth and market share reach. Further, management pulled off a successful secondary offering in mid-February at a price SHOP stock is still above today.
It also hasn’t missed an earnings or revenue estimate in three years!
Speaking on the company’s earnings results, CEO Tobias Lütke commented:
“These layers of value we offer merchants give us a healthy variety of growth drivers. One of those drivers is our merchants’ own success. Helping them get their first sale and keeping them selling is a big part of what we work on every day.”
Trading Shopify Stock
In the first five months of 2017, shares of SHOP stock doubled. While the move from $90 to $145 is still really impressive, it’s taken about a year to pan out. In a perfect world, a strong stock can consolidate while churning higher, and that’s been exactly the case here.
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Shopify stock has been quietly grinding higher over the past 12 months and now sits about $10 per share off the highs it set in March. While there have been a few analysts that hit SHOP with a $130 price target and a hold rating, even more have reiterated their buy ratings and bumped their price target to $150 or more. One analyst even assigned a $170 price target.
While it would be discouraging to short-term bulls, a slight pullback to the $135 level would be encouraging. Any sort of “breather” or consolidation between $135 and $145 should be viewed as bullish price action. It would allow Shopify stock to recharge before retesting its prior highs.
While SHOP has a big valuation, let’s not forget the stock continues to trend higher. Below $120, and the narrative changes. But for now, investors have to assume the trend is still from the lower left to the upper right. The stock’s response to earnings is just another confirmation of that outlook.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
