Shopify (NASDAQ:SHOP) provided clues that its return to new highs was not only possible, but likely. Who listened? Unfortunately, not everyone. Shopify stock has not only hit new highs, but it has absolutely exploded higher over the last few months.
When the stock topped out at $409.61 in August, it embarked on a multi-month decline. That’s not a bad thing. After all, it had been on a huge run while almost every notable growth stock was under pressure too, including Twilio (NYSE:TWLO), Roku (NASDAQ:ROKU), Okta (NASDAQ:OKTA) and Veeva Systems (NASDAQ:VEEV), among others.
However, unlike these stocks, Shopify wasn’t completely creamed. The stock never even tested its 200-day moving average (although it did come close). Since bottoming at $282 in November, the stock rallied almost $200 per share or about 69%.
That’s a kick in the gut for investors who didn’t buy.
Changing the Game
Shopify stock is a growth company, plain and simple, and it’s valued like one too. Shopify commands a massive $54 billion market capitalization, is barely profitable and is forecast to generate sales of “just” $1.55 billion in fiscal 2019.
But the company is changing the way e-commerce works. Amazon (NASDAQ:AMZN) was, is and will continue to be the online shopping king for some time. But it controls the entire experience of its shoppers. Amazon is the middleman in charge, and it doesn’t matter if customers are searching for a flimsy replacement iPhone charging cord or Tylenol from one of the country’s largest companies, Johnson & Johnson (NYSE:JNJ).
Other companies, like Nike (NYSE:NKE) and Procter & Gamble (NYSE:PG), are aware of this and they don’t like it. They want to have some control too.
The problem has been, there was no alternative. That is, until Shopify came along. The company is shifting the e-commerce landscape and put simply, that’s worth a premium. The company enables e-commerce for everyone ranging from P&G and J&J to Kylie Jenner to the average Joe.
Valuing Shopify Stock
These sorts of transformational companies aren’t valued on a quarter-to-quarter or even a year-to-year basis, even though that’s what investors try to do. I’m not saying valuation doesn’t matter — it does — but you can’t value an nontraditional company by traditional metrics. It just doesn’t fit the mold.
Analysts expect earnings of 19 cents per share in 2019 and 93 cents per share in 2020. For revenue, estimates call for 45% growth to $1.55 billion this year and 36% growth to $2.11 billion in 2020. That’s 25-times 2020 revenue estimates, and certainly isn’t cheap.
Let’s put it this way: a 22% correction lands Shopify stock at 20-times 2020 revenue, which is still a lofty valuation. But if we can buy it at a $42 billion valuation, investors need to ask themselves if they can hold for 10 years through the ups and downs.
Shopify is in a secular growth trend — e-commerce — and is disrupting how the game is played. It’s high-risk, high-reward, but it’s working. Can I see this company being valued at $100 billion or more in 2030? Yes, I can.
If that’s the case, and I think it’s conservative, that’s good for an approximately 138% return over the next decade, a 9% compound annual return. Some will argue the risk isn’t worth the reward and that’s fair. But can you absorb the opportunity risk, say in the event that this is a $210 billion company in 10 years, a five-fold increase from our $42 billion market cap pullback target?
Trading SHOP Stock
Looking at the chart shows the runaway rally for Shopify stock, but that rally is starting to unwind.
Click to Enlarge
Look at it this way: A pullback down to the 20-day moving average would send Shopify stock all the way down to $431. That’s a roughly 10% correction and even then, Shopify stock would still be okay from a technical perspective. In fact, not only would it be holding up over its short-term moving average, its uptrend support mark (blue line) would still be intact.
So, understand that Shopify stock can come in quite a bit and still hold its bullish trends. Ultimately, I’d love a check-back down to this $410 to $420 breakout area. Keep in mind, the 50-day moving average is still 20 points south of $400, although it’s rising rapidly.
To get Shopify stock down to a $42 billion market cap, we’d need a correction down to the $365 to $370 area. That’s possible but will likely need a broad market decline to help get it there. While it seems big now, it’s hard to imagine we will never see SHOP stock below $375 again.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long ROKU, AMZN and TWLO.
