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Shopify Stock Is Not a Good Buy Going Into Earnings

Will Healy

Many eyes will turn to Shopify (NYSE:SHOP) stock as the Ontario-based software company releases its quarterly report on August 1st before the bell.

As Analysts See Shopify Stock as Fairly Valued, Investors Ponder How to Sell

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Shopify stock has seen a massive surge higher as the equity came off of its December lows. Still, with valuations at elevated levels and a growing threat of competition, investors face serious risks buying this company before the report.

SHOP Likely to Report Earnings Beat, Growth

Wall Street forecasts second-quarter earnings of three cents per share. This would come in 50% higher than the two cents per share posted in the same quarter last year. Analysts also predict revenues of $350.46 million. If the company meets estimates, revenues will have grown by 43.1% from year-ago levels when SHOP reported $244.96 million in revenue.

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Still, SHOP stock has beaten earnings estimates over the last four quarters. Hence, investors can probably expect more than three cents per share in earnings. Investors should also note that SHOP has risen by more than 180% since its December lows alone.

Massive Growth, Leadership Keep SHOP Stock High

This is why I stated in a recent article that SHOP stock had come “too far, too fast,” and it would struggle to move higher. Since that time, the stock has risen by about 10%. With the stock trading at a forward price-to-earnings (PE) ratio of over 355, it becomes difficult to predict. The quarterly report could just as easily push the spike to a new record high as it could lead to a swoon.

SHOP stock has likely risen so much because it is the “anti-Amazon.” It enables small businesses to reach the world through e-commerce without the involvement of an Amazon (NASDAQ:AMZN), Etsy (NASDAQ:ETSY), or other large e-commerce platforms.

As our own Luke Lango stated, the global e-commerce market registered about $2.8 trillion in sales last year. About $41 billion sold on Shopify platforms, which comes to approximately 1.5%. Mr. Lango believes that it can rise to 2% this year. Analysts also predict global e-commerce sales will reach $4.9 trillion by the end of 2021. Little wonder that analysts forecast 56.79% average annual profit growth for SHOP stock over the next five years.

SHOP Has Become Unpredictable

At that rate, Shopify stock might trade higher than current levels ten years from now. The question is, what it will do in the meantime? While 56.79% annual growth is impressive by any measure, does it justify paying over 355 times forward earnings?

Moreover, businesses have other choices besides Shopify for independent e-commerce platforms. Due to my writing, I frequently come in contact with WordPress developers. When these developers create a retailing site, they speak only of WooCommerce, never mentioning Shopify.

Numerous other small firms, as well as Salesforce (NYSE:CRM), also compete in this industry. Further, thanks to its purchase of Magento, SHOP has attracted competition from a better-established software company, Adobe (NASDAQ:ADBE).

In fairness, anecdotal evidence shows that Shopify continues to outperform Magento in the marketplace. In the same way Netflix (NASDAQ:NFLX) stock has flown high by staying ahead of its competition, SHOP stock could continue to outperform. However, Netflix has also fallen back due to the competitive threat of Disney (NYSE:DIS). In much the same way, a strong peer could end the run in Shopify stock.

Should Investors Buy Before Earnings?

At current price levels, the risks do not justify buying SHOP stock. Without question, those who have owned SHOP stock since December or before have seen massive returns. Also, despite the 355-plus forward PE ratio, the stock could continue its march higher.

However, I would avoid buying into earnings. At current levels, the financials price SHOP stock for perfection. Even a good quarterly report could cause SHOP to plunge if Wall Street expected a great report.

Shopify stock is a long-term winner. I think at some point, it will trade above current levels. Still, for now, more can go wrong then right with SHOP stock, and buying into earnings has become a gamble.

How lucky do you feel?

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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