Doing All the Right Things Isn’t Enough to Keep Driving Shopify Stock

While eCommerce has been around since the mid-1990s, the market is still very much in the growth phase. Just look at the momentum of Shopify (NYSE:SHOP). The company, which has developed a platform that makes it fairly easy for companies to sell online, is growing like a weed. Already this year, Shopify stock is up about 34%. In fact, during the past three years, the compound annual gain was a blistering 112%!

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The latest earnings report from the company certainly highlights its strengths and opportunities.

Keep in mind that – ahead of the fourth quarter announcement – the expectations for Shopify stock were already at lofty levels. But yet again, the company was able to pull off an impressive beat.

Revenues jumped by 47% to $505.2 million on a year-over-year basis, while the census was looking for $482.05 million. As for earnings per share, they came to 43 cents. Wall Street, on the other hand, was looking only for 24 cents a share.

The guidance was also robust. For the current quarter, Shopify is forecasting revenues of $440 million to $446 million and full-year revenues of $2.13 billion to $2.16 billion. This compares to the consensus forecast of $444.5 million for the quarter and $2.11 billion for the full year.

Growth Drivers

But of course, the fact that eCommerce is a secular growth market does not fully explain Shopify’s success. After all, if this were the case, then eBay (NASDAQ:EBAY) would be doing much better!

The fact is that Shopify has remained focus on investing in innovation. In a sense, this comes straight from the Amazon (NASDAQ:AMZN) playbook.

Here are just some of the moves Shopify made last year:

  • The company launched Shopify Capital for customers who do not use the company’s payment services. This has expanded the growth of the business. For 2019, Shopify Capital has advanced more than $430 million in credit.
  • There have been a variety of new digital marketing features rolled out. They include Shopify Chat, Shopify Email and ad-buying systems for Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT).
  • Shopify has added more features to help streamline the operations for merchants. Examples of this include a language translation API and single-sign on.

Although, the biggest innovation has been with the Shopify Fulfillment Network. This has made it much easier for small businesses to quickly and cost-efficiently deliver products to customers. A big part of this effort has been Shopify’s acquisition of 6 River Systems.

For the most part, the company is creating a powerful eCommerce ecosystem.

Here’s how Shopify COO Harley Finkelstein explained it in the earnings call: “As we lower the barrier to entry to entrepreneurship, more people are trying their hand at starting the business on Shopify. This enables Shopify and our expanding ecosystem of partners to keep innovating to help merchants of all sizes sell more and sell more efficiently. This translates into the success that our merchants are seeing today. “

Bottom Line on Shopify Stock

Despite all the success, Wall Street analysts are getting a bit antsy with Shopify stock. The fact is that the valuation is at nose-bleed levels, with the price-to-sales multiple at 28 times sales (this is on a forward basis).

According to Credit Suisse analyst Brad Zelnick, the average multiple for similar companies is at 13X. As a result, he has downgraded Shopify stock from “outperform” to “neutral.”

Granted, expensive stocks can continue to rise. But if there is a deceleration – which could easily happen if the economy slows down – then Shopify stock would be very vulnerable.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.  As of this writing, he did not hold a position in any of the aforementioned securities.

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