While shares of e-commerce platform Shopify (NYSE:SHOP) have been big winners in 2018, Shopify stock dropped 10% on Friday, Dec. 14, on news that the company intends to carry out a secondary offering. Specifically, SHOP plans to issue and sell 2.6 million Class A subordinate voting shares for $154 per share. Investors freaked out about the dilution, and also weren’t pleased that the offering came in below the stock price, which was $161 at the time.
So SHOP stock price dropped sharply, reaching levels well below the $154 offering price.
But that’s nothing for investors to worry about. Instead, this is an opportunity. Shopify has carried out such secondary offerings before, and SHOP stock price always drops after such offerings are announced. Then it always rebounds to new highs shortly thereafter. Thus, history says this dip in Shopify stock is a buying opportunity.
Meanwhile, the core fundamentals underlying Shopify stock remain as strong as ever. The consumer is on fire, the digital transition remains as potent as ever, and the gig economy is only gaining traction.
Given all of these circumstances, investors shouldn’t freak out about the drop of SHOP stock. This dip is nothing more than an opportunity to buy.
Secondary Offering Selloffs Are Usually Followed by Big Rebounds
This is Shopify’s third secondary offering in the past two years. After each offering was announced, Shopify stock price dropped. But then, all three times, Shopify stock rebounded strongly and quickly to new highs within no time. The same thing should happen this time around.
In May 2017, Shopify issued and sold 5.5 million Class A subordinate voting shares for $91 per share. Shopify stock proceeded to drop 6% from $94 to $88 over the course of a few days. Then it swiftly rebounded. By June 2017, SHOP stock price had reached $100.
The same thing happened in February 2018. Shopify issued and sold 4.8 million Class A subordinate shares for $137 per share. Shopify stock immediately dropped more than 7% from $143 to $132. Then it immediately rebounded. By March, SHOP stock price had climbed to $150.
We have a similar set-up today. SHOP is issuing and selling 2.6 million Class A subordinate shares for $154 per share. SHOP stock price immediately plunged 10%. Within the next few days to weeks, SHOP stock should again rebound to new highs.
Shopify’s Fundamentals Remain Rock Solid
Beyond this near-term noise, Shopify stock remains supported by one of the most robust secular growth narratives in the market.
There are really three components of SHOP’s growth story. The first is the consumer. As long as the consumer remains healthy, the sales of Shopify’s websites will remain robust. At the moment, there are plenty of reasons to believe that consumers are strong and will remain strong for the foreseeable future. Namely, the U.S. jobs market remains healthy, November retail sales came in strong, and jobless claims last week dropped to a nearly 50-year low.
The second component of Shopify’s growth story is e-commerce. As long as the shift to e-commerce persists, the sales of Shopify’s websites will remain robust, too. At the moment, we have every reason to believe this shift continues to have momentum.
Specifically, in that November retail sales report, non-store retailers reported an 11% year-over-year jump in sales, the biggest increase in the retail sector and in-line with the trailing three-month average. Meanwhile, data from Adobe Analytics shows that digital retail sales this holiday season are in-line to surge nearly 20% year-over-year.
The third component is the gig economy. As entrepreneurship becomes more popular, more people will sell stuff on their own and try to start their own digital stores. As long as that trend continues, Shopify’s potential customer base will continue to expand. At this point, all signs point to the gig economy only gaining traction. Gig economy participation rates are hitting all-time highs, especially among younger demographics, and that means this trend is here to stay.
Overall, the core fundamentals supporting Shopify stock remain as strong today as ever before. Thus, the near-term weakness of SHOP stock price is nothing more than a medium-to-long-term buying opportunity.
The Bottom Line on SHOP Stock
Secondary offerings always create near-term weakness in SHOP stock price. But those declines are also always followed by big, quick rebounds to new highs. Considering the fundamentals underlying Shopify remain as strong as ever, history should repeat itself, and SHOP should rebound quickly from this secondary offering selloff.
As of this writing, Luke Lango was long SHOP.
