In the short-term, Shopify (NYSE: SHOP) stock can climb further, driven by the rapid growth of e-commerce and investors’ excitement about its success in the sector. But over the medium-term, given the shares’ sky-high valuation and elevated market cap, along with the company’s tiny profits, SHOP stock is unlikely to climb too much higher.
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Moreover, Shopify’s lack of profits and high valuation makes it especially vulnerable to the type of widespread tech pullback that investors endured in December 2018. Further, it may soon encounter new competition that could cause its growth to decelerate, spooking investors.
However, if Shopify can, like Amazon (NASDAQ:AMZN), successfully develop a new, more profitable business, the stock can rally meaningfully. Also, if the company is able to penetrate China on a widespread scale, the shares can rally over the long-term.
Shopify Stock Can Climb Further in the Short-Term
Investors are clearly ecstatic about the e-commerce sector. And there’s some justification for their exuberance.
After all, as another InvestorPlace writer, Brad Moon, pointed out in a recent article:
Cyber Monday’s sales of $9.4 billion shattered the record for the biggest online shopping day in U.S. history. Shopify announced that the merchants on its platform had also broken records, ringing up over $2.9 billion of sales globally during the Black Friday/Cyber Monday weekend.
Moreover, Amazon on Jan. 30 reported stronger than expected e-commerce results. Most relevant for Shopify, the revenue of its third-party seller services came in at $17.4 billion, versus the consensus outlook of $1.5 billion.
Valuation, Low Profits Could Hurt Medium-Term
Shopify is trading at about 26 times analysts’ average 2020 sales estimates for the company. By contrast, Roku (NASDAQ:ROKU) is changing hands for 9.16 times the average 2020 sales estimate, while Square (NYSE:SQ) is trading at just over ten times the average 2020 sales estimate and Tesla (NASDAQ:TSLA) is trading at less than three times the mean 2020 sales estimate.
Analysts, on average, expect Tesla to report a meaningful profit of $7.06 this year, while the average estimate for Shopify’s EPS is less than $1.
Roku, furthermore, has a market cap of just over $14 billion. At that level, one of the tech giants, such as Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), Samsung, Apple (NASDAQ:AAPL), or Amazon, could still easily buy the company.
Conversely, with SHOP stock sporting a market cap of about $54.5 billion, it’s probably too expensive for a tech giant to swallow. Many investors will likely keep that disparity in mind going forward, especially if the market treads water or drops for a couple of months.
New Competition May Be on the Horizon
In early 2019, Square launched a similar service to that of Shopify. On Jan 30, UPS (NYSE:UPS) announced that it would provide fulfillment services for the users of Square’s service, wrote Keefe, Bruyette & Woods analyst Steven Kwok to his clients. The service could help Square compete more effectively with Shopify.
Moreover, bigger companies like Google or PayPal (NASDAQ:PYPL) could look to compete with Shopify in the medium-term. I’m a big believer in first-mover advantage, so I don’t think new competition will cause Shopify’s results to plunge. But even a 10 to 15 percentage point slowdown of its revenue growth would likely put a big dent in the stock price given the shares’ high valuation.
How Shopify Stock Can Rally in the Long-Term
Amazon stock really only went into second gear when its cloud unit started generating huge profits. Similarly, SHOP stock can jump tremendously if it manages to launch a highly profitable business alongside its e-commerce business. In time, its fulfillment business could fit the bill.
Alternatively, if the company manages to meaningfully penetrate China, which has a huge population and extremely high e-commerce growth rates, Shopify stock can jump much further.
The Bottom Line on Shopify Stock
Shopify can climb further in the near-term, but its exceptionally high valuation make it risky in the medium-term. Over the longer term, it can climb much higher if it can successfully penetrate China or if one of its other businesses becomes highly profitable.
Longer term investors looking for a tech growth would be better off with Roku, Tesla, or Square.
As of this writing, the author did not own shares of any of the aforementioned companies.
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