It’s already one of the most popular stocks on Wall Street, but some investors worry if the best has passed. Is Shopify a good investment?
It’s been one of the best-performing stocks in an industry already dominated by Amazon (NASDAQ: AMZN, and since its IPO five years ago, its stock has soared 3,000% — Shopify (NYSE: SHOP) also recently became MyWallSt’s® first 20-bagger.
Having weathered the coronavirus pandemic well so far, Tobias Lütke’s challenger to Jeff Bezos’ e-commerce throne is shattering records in 2020 and reaching all-time highs for fun, but is it too late to get in on this action? Should investors still buy into Shopify?
The bull case for Shopify
Shopify is riding the illustrious e-commerce wave caused by the coronavirus, as more businesses have moved to online sales in 2020 than it has in the past 14 years, Shopify has been able to make the most of this. Even though its predominantly small and medium-sized customers are the ones to suffer thanks to the pandemic, they are also the ones jumping into e-commerce.
At its Q1 earnings report back in May, the company beat expectations with earnings per share soaring 210% to $0.19, while revenue rose 47% to $470 million. What’s more, it reported a non-GAAP operating loss of $7.3 million, much lower than the estimated $31.3 million loss. Its rising merchant count is showing no signs of slowing down as gross merchandise volume from merchant customers also jumped 46% to $17.4 billion, topping estimates of $16.83 billion.
Not one to rest on its laurels, Shopify’s stock spurred onward, rising 25.3% in June compared to the S&P 500’s (NYSEARCA: VOO) 1.84% rise. Much of this comes thanks to its strategic partnerships with both Facebook (NASDAQ: FB) and Walmart (NYSE: WMT) as the big players try to take on Amazon’s dominance. This comes on top of the company’s increased recurring revenue via subscription services, which now account for roughly 40% of its total earnings as it embraces the world’s favorite business model.
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We have only scratched the surface of what’s going right for Shopify in 2020 so far and it currently stands as one of this year’s best-performing large-cap stocks. Its recent record $120.74 billion market cap — as of July 2 — sets it at a higher value than Twitter (NYSE: TWTR), eBay (NASDAQ: EBAY), and Square (NYSE: SQ) combined, and with e-commerce on the rise, it’s got a lot more growing to do.
The bear case for Shopify
No company is invincible, no matter how hyped. There are a number of risks that could come back and haunt Shopify:
1. Strong competition
As e-commerce rises, so too do its participants, and that doesn’t just include online stores, but also payment, cloud security, and more. Companies like Square, PayPal (NASDAQ: PYPL), and Google (NASDAQ: GOOG) compete in its growing payment solutions sector, while Amazon, Mercado Libre (NASDAQ: MELI), Alibaba (NYSE: BABA), and Sea Ltd (NYSE: SE) are all gunning for e-commerce space.
2. The rising costs of growth
Since Shopify’s IPO, its average annual revenue growth has been more than 70%. Over time it becomes harder to sustain this rate of growth. Meanwhile, the company also is still not profitable, generating a net loss of $125 million in 2019.
3. Exposed target market
It may not be having a serious impact on Shopify yet, but its main audience is the endangered small and medium-sized business. Three-quarters of its overall client base sits in this category and are at extreme risk of failing as the economy slowly reopens, and especially if there is a second wave of infections.
So, should I buy Shopify stock?
Absolutely. The stock just broke past the symbolic $1,000 per share mark on July 1 and is continuing to roar on. Having shown its growth potential long before COVID-19 left its mark on the world, Shopify only stands to gain from the ensuing growth in e-commerce.
What’s important to remember is that it is never too late to get in on this stock, which could potentially be the next Amazon.
No, Shopify does not pay dividends and recently announced that it does not intend to start any time soon.
Based on data compiled in June 2020, Shopify, along with the whole market is overvalued somewhere in the range of 66% to 149%.
Absolutely not. That would be an antitrust nightmare.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.