Shopify (SHOP), the upstart challenging eBay (EBAY) and Amazon.com (AMZN), delivered record Black Friday sales as the coronavirus pandemic fuels the online shopping boom. But is Shopify stock a buy right now?
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The e-commerce platform provider helps small businesses to set up shop online and build their brands. BigCommerce (BIGC), a new IPO, is a close competitor. But tech stalwarts Microsoft (MSFT), Adobe (ADBE) and Facebook (FB) have also made a push to provide e-commerce solutions for businesses.
Shopify was started by snowboarding enthusiasts a decade ago. In fact, it started as an online snowboard shop, moving into e-commerce software when the founders couldn’t find what they were looking for — a platform to both sell goods and grow the brand.
The Canadian software company helps more than 1 million merchants across 175 countries to sell, market and manage their products. In return, it earns subscription fees. It also offers shipping, digital payments and fulfillment. In 2019, subscriptions accounted for 41% of revenue and merchant solutions for 59%.
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Shopify Stock Technical Analysis
Shopify stock leapt 7.75% to 1157.31 on Dec. 16, blasting past a 1112.51 handle buy point to a new high on a consolidation going back to Sept. 1. Volume was more than double normal. Shares kept rising and are now extended from the buy zone. SHOP stock has quadrupled from the March coronavirus low of 305.30.
The relative strength line moved above its July peak, ending a pause following a multiyear run. The RS line, which measures Shopify stock’s performance against the S&P 500, is the blue line in the chart shown.
Shopify stock earns an IBD Composite Rating of 98 out of 99. The rating combines key fundamental and technical metrics in a single score.
The e-commerce software stock was a huge winner in 2019 and continued to outperform until September’s selling pressure. It has a 92 RS Rating. Shares kept moving higher during last year’s stock market pullbacks, an especially bullish sign given the massive run-up in price since 2017.
The Accumulation/Distribution Rating of B- reflects slightly more buying than selling by institutions in the past 13 weeks. Shopify launched its stock IPO at 17 in May 2015 and has solid institutional backing: 1,605 funds owned the stock as of September, up from 1,400 in June.
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SHOP Earnings And Fundamentals
On key earnings and sales metrics, Shopify stock earns an EPS Rating of 98 out of 99, and an SMR Rating of B, on a scale of A-E, with A the best. The EPS rating compares a company’s earnings growth to other companies, and its SMR Rating measures sales growth, profit margins and return on equity.
On Oct. 30, the e-commerce software leader crushed earnings and revenue estimates for the third quarter. Shopify earnings of $1.13 a share contrasted with a net loss of 29 cents per share a year ago, as revenue jumped 96%. The key metric of gross merchandise volume, or the value of all goods sold on the Shopify platform, soared 109% to $30.9 billion, beating estimates of $27.46 billion. In the prior quarter, GMV jumped 119%.
The sales surge further cemented views that brick-and-mortar businesses are pivoting online. Despite strong results, SHOP stock sold off as the company warned that 2020’s huge pandemic-related gains may not continue. The company also did not provide a financial outlook for Q4 or full-year 2020, citing macroeconomic uncertainty.
When Shopify next reports, analysts expect Q4 EPS to jump 65% to 71 cents. Sales are seen climbing 77% to $894.5 million, according to Zacks Investment Research. Shopify earnings are likely to soar 743% in all of 2020 and to decline 0.2% in 2021. Take Wall Street’s estimates with a pinch of salt in the pandemic market.
Analysts call SHOP a structural winner from the e-commerce surge during the coronavirus pandemic. Goldman Sachs forecasts that global e-commerce will grow 19% annually over the next three years, up from a prior view of 16%, driven by gains in the U.S., Western Europe, Brazil and most of all, Asia Pacific and China.
Over the past three quarters, Shopify grew earnings at a 552% average clip, well above the three-year average of 101%. It grew sales by 57% on average over the past three years. Investors should generally look for stocks with sustained earnings and sales growth of at least 25%. So SHOP stock is far ahead on both counts.
The hot software stock lags several peers with its 5.8% pretax profit margin, the IBD Stock Checkup tool shows. Its 1.3% return on equity is well under the minimum 17% or higher that investors would want to see.
Eleven analysts have a buy rating on SHOP stock, 14 have a hold and one has a sell, per Zacks.
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Coronavirus Impact On Shopify
The coronavirus impact on Shopify’s business has been largely positive, according to the company.
“The accelerated shift to digital commerce triggered by Covid-19 is continuing, as more consumers shop online and entrepreneurs step up to meet demand,” Shopify President Harley Finkelstein said Oct. 29.
But near-term demand for Shopify’s subscription and merchant solutions face some uncertainty from several “fluid” external factors, the company said. Those include unemployment, fiscal stimulus and the magnitude and duration of the pandemic. All of these may impact new shop creation by merchants on Shopify’s platform, as well as spending by consumers.
Still, “Shopify remains uniquely positioned to level the playing field for entrepreneurs during this period of rapid change in the retail landscape,” the company added.
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Spending On Shopify Tops eBay – Amazon Next?
Shopify is seen as a growing threat to the e-commerce dominance of Amazon and eBay. In fact, Shopify surpassed eBay in gross merchandise volume for the first time in Q2, and again in Q3, with the latter reporting GMV of $25 billion Oct. 28.
But Shopify is not itself a retailer; rather, it helps its mostly small and midsize customers compete against larger businesses. They use Shopify’s tools to build websites, list products and collect payments, all under their own domain name and brand.
The company had several notable achievements in Q3. Among the highlights:
- It began to roll out Shop Pay Installments, a product that gives customers more payment choice and flexibility at checkout, while helping merchants boost sales through increased cart size.
- It further built out Shopify Fulfillment Network, including software development for the service. Shopify could break even on this $1 billion investment by 2023, analysts say.
- It also grew programs for business lending (Shopify Capital) amid the pandemic, and to help merchants mail online orders (Shopify Shipping) with less friction.
Since Q3, Shopify forged a marketing partnership with viral video-sharing app TikTok. Earlier partnerships included Walmart (WMT), Pinterest (PINS) and well-funded startup Stripe. And on Nov. 28, Shopify disclosed record-setting global Black Friday sales of $2.4 billion, up 75% from last year. For the full Black Friday/Cyber Monday weekend, Shopify scored $5.1 billion in worldwide sales, up 76%.
KeyBanc Capital Markets on Wednesday speculated that Shopify could eventually levy an e-commerce fee from merchants, similar to larger rival Amazon.com, noting that Shop Pay now has 60 million users.
However, Shopify confronts an increasingly crowded field of companies providing e-commerce capabilities to businesses.
Adobe acquired e-commerce technology firm Magento in 2018. Microsoft launched Dynamics 365 in 2019. Long-time partner Facebook introduced Facebook Shops and Instagram Shops in 2020.
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SHOP Stock Group
Shopify belongs to IBD’s Computer Software-Enterprise group, which ranks No. 40 out of 197 industry groups, according to the IBD Stock Checkup tool. Shopify stock itself ranks No. 2 out of roughly 70 stocks in this group.
Salesforce (CRM), Twilio (TWLO), Paycom Software (PAYC), ServiceNow (NOW), DocuSign (DOCU), Workday (WDAY) and Zoom Video (ZM) are other top stocks to watch in this group. Rival Adobe belongs to the Computer Software-Desktop group.
Until the coronavirus hit, software stocks had been rising broadly as concerns about global growth and the China trade war both eased. Amid the deadly virus, enterprise software stocks have been winners because of the work-from-home trend.
Shopify stock has joined Adobe and ServiceNow on the IBD Leaderboard.
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Is Shopify Stock A Buy Right Now?
Shopify ticks off many of the boxes that investors should be looking for. SHOP stock was a big winner in 2019 and again in the coronavirus market rally. Key acquisitions and expansions promise more runway for growth.
The software company smashed Q2 and Q3 earnings estimates. Analysts are betting on big Shopify earnings growth due to the accelerating e-commerce shift.
From a technical viewpoint, SHOP stock has rallied above a buy point to a new high, but is now extended.
Bottom line: Shopify stock is not a right now. But look to see if SHOP stock forms a new consolidation or pullback for another buying opporutnity.
Other large-cap stocks to buy right now may also offer proper breakouts as well as the potential for solid rewards.
To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD research.
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