Ahead of earnings this Thursday morning, Shopify (NYSE:SHOP) stock is down almost 3% in the past week. Investors seem to be taking some exposure off cloud stocks as a whole coming into another big earnings week. Coupa Software (NASDAQ:COUP) and Salesforce.com (NYSE:CRM) are both down in the last five days, albeit less than 1%.
Some investors may be inclined to attribute the broad selloff in software/cloud stocks due to the bearish Barron’s article that claimed “soaring software stocks show signs of a bubble.” In reality, after big run-ups, it’s not uncommon for investors to take some gains. The article probably isn’t moving markets in the way a reader might assume, but rather this is normal market dynamics at work. Many traders, for instance, don’t want to get caught with too much exposure to a sector, even one they like, especially with the Fed meeting this week as well.
What that means is that sitting on your hands could prove to be a smart tactic for names investors would like to hold long-term. Shopify stock is one of those names where scaling in, or cost averaging, into an equity position could payoff after the earnings volatility subsides.
Regardless of what SHOP stock earnings look like on Aug. 1, which I personally expect to be more growth and more traction, there’s no doubt that Shopify stock is in a long-term uptrend.
A positive report will provide some momentum to break higher toward that $400 per share mark.
SHOP Stock’s Merchant-centric Approach
While Amazon.com (NASDAQ:AMZN) has been very vocal about being obsessive over its customers and keeping those customers happy, Shopify has taken an approach from the other side of that equation: the merchants.
AMZN has created significant value and customer loyalty with this customer-first focus. However, Shopify’s strategy has proven to be equally valid. The growth numbers speak for themselves with 50% revenue growth last quarter.
To be sure, the market is expecting this to continue and any misses here will cause the stock to decline further, but management guidance of $345 million to $350 million seems imminently attainable. That translates to more than 40% growth year-over-year.
Given that continued ascendance of DTC (direct-to-consumer brands) and more small businesses going online, SHOP should be able to capture a high percentage of that shift and hit its guidance targets.
That said, it will be important to focus on the number of new merchants the company added during the quarter. It will also be important to make sure that growth in the merchants that upgrade to Shopify’s Plus subscription plan is also being sustained.
SHOP Fulfillment Network
Because Shopify’s emphasis has been on the merchant, it only recently announced its plans for a “shopper fulfillment network” to compete with Amazon on delivery. For Shopify, this is a strategy to support its large network of merchants.
As I’ve noted before, last quarter, Shopify Shipping adoption rates were increasing, with more than 40% of eligible merchants in the United States and Canada using the service.
That metric needs to keep increasing to justify the investment the Shopify is making in the network. It may show up immediately in the financial figures, but management will need to give indication that it is, in fact, driving more traffic to the platform and increasing sales conversions. In theory, it makes sense and should work, but it comes down to execution, so investors need to know that management’s approach is effective.
Overall, it’s looking very positive for SHOP stock. If they deliver the growth the market is expecting, Shopify stock will head skyward.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
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