Every growth investor is aware of Shopify (NASDAQ:SHOP) as shares have been blistering higher over the years. Surprisingly, many investors are unaware of Shopify stock, what it does, and how it came rocketing onto the scene.
Shares are up over 2,600% over the past five years and 700% over the past three. Despite the novel coronavirus pandemic, Shopify stock is still up 90% so far in 2020.
Put simply, this company is a winner. Stock prices do not climb in that manner without a good reason. Shopify is tapping into the e-commerce trend, but it’s not trying to build another Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) or Alibaba (NYSE:BABA). Instead, it’s building a unique ecosystem for businesses.
Digging Deeper on Shopify Stock
As convenient as online shopping is, there’s a problem with e-commerce. Put simply, there is not enough control over the experience. Whether you’re a small business or a company like Johnson & Johnson (NYSE:JNJ), you have to play by somebody else’s rules.
By somebody else, I mean Amazon.
While there are other alternatives and platforms out there, Amazon is the prevailing juggernaut. There’s something kind of odd about J&J having its Tylenol lined up next to its competitors, isn’t there? That goes for Procter & Gamble’s (NYSE:PG) detergent and Energizer’s batteries, too.
But until Shopify came along, building out an online store and system was too cumbersome. Beyond that, handling all the other inputs — like logistics — was a headache, too. It was far easier to warehouse with Amazon and sell through its channel, even if that meant giving up virtually all control in the customer experience.
Enter Shopify. The company makes it so that a company as large as P&G or as small as Matt’s Best Placemats has a way of running their own online store. The merchants control the customer experience from beginning to end. Shopify simply provides the ecosystem to make it work.
That’s everything from building the store front, processing payments, to even handling the logistics. Its warehousing service is what could really shift the e-commerce landscape.
Is this the death of Amazon? No, not at all. But it’s a shift in the way things are done, and it’s what e-commerce has needed to see come to fruition. J&J will still sell on Amazon, but there’s a reason that Nike (NYSE:NKE) and others have stopped their pilot program with the online titan.
The Charts Aren’t Always Right
But there is a downside here and that is price. Great growth stories come at a price, and Shopify stock is no different.
We’re not going to dissect the technicals, but we can see how much sentiment plays a role in investing. After the close on April 1, Shopify announced it had strong momentum in January and February, which will allow it to report revenue and adjusted income “within or ahead of the range.” However, it would suspend full-year guidance due to uncertainty. Shares were down 7.7% that day ahead of the news, then fell 10% in the first session after the update.
On May 6, Shopify delivered an earnings report that was largely in-line with what management told investors on April 1. It beat on earnings and revenue — as expected — and did not provide full-year guidance. Shares rallied 6.9% that day, after already climbing 105% from the April 2 low to the close ahead of earnings.
The lesson? Don’t be a seller just because the market is selling — and don’t be a buyer just because the market is buying.
Concerns About Shopify Stock
As much as I love this stock, it’s expensive. Shopify stock is up 150% from the 2020 lows and is trading near all-time highs, while uncertainty seems to be near an all-time high as well.
Analysts expect 25.5% revenue growth this year to almost $2 billion. In 2021, forecasts call for 37% growth to almost $2.75 billion in sales. Earnings are forecast to be about break-even this year and show a slight gain in 2021.
This isn’t a profit story yet, Shopify stock is a growth story. But with a $90 billion market cap and just $2 billion in expected sales this year, it’s a tough pill to swallow from a valuation perspective.
That’s why I’m saying this name is a buy on the dips. E-commerce isn’t going anywhere and neither is Shopify. But 45 times forward sales and 33 times 2021 estimates is very expensive. There will be a better opportunity to buy than at $750 a share.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.