Shopify share price: is there room left to run ahead of earnings?

As Shopify [SHOP] builds up to its Q4 2019 earnings results tomorrow, investors will be asking if the share price is likely to cool off after a yearlong rally.

Strong Christmas sales pushed Shopify to deliver one of its strongest yearly share price performances yet. The Canadian e-commerce company’s share price rose by near 200% in 2019.

Investor optimism was based on the news that Cyber Monday 2019 was the largest US e-commerce sales day ever, generating an estimated $9.4bn. On this news, Shopify confirmed that merchants on its platform had also broken records for Cyber Monday and Black Friday, achieving more than $2.9bn in sales globally.

Shopify’s full sales figures over the period will come in on 12 February when its reports its Q4, 2019 results. With such steep gains in 2020 so far — the share price has risen by 21% up to 10 February’s market close — investors will be wondering if the platform’s share price can continue to gain, or if it’s due for a correction.

Is Shopify’s share price overvalued?

Shopify’s share price is trading at 513x estimated 2020 earnings, according to a 4 February report by InvestorPlace. By comparison, Amazon’s forward P/E ratio is 66x and Square is trading at around 80x its 2020 earnings, putting the platform at the top end of the value spectrum.

While Shopify’s share price has ballooned to near the $500 mark (on 5 February the platform hit an all-time high of $495) its revenue growth rate has been falling over the past year, dropping from 50% growth in Q1 2019 to an estimated 40% for Q4 2019.

This has many investors wondering if all of Shopify’s good news is now priced into the stock, Thomas Niel writes in InvestorPlace. In this case, the platform’s share price may finally be topping out, he said.

What happened last quarter?

In the days after Shopify reported Q3 figures on 29 October, its stock slipped 3.5%.

Shopify posted an earnings loss of $0.25 per share, which missed analysts’ expectations of a $0.11 gain. The company’s revenue growth of 45% year-over-year was also its slowest in four years, which disappointed investors.

The figures are not expected to drag the company for the long-term, and were driven largely by “a significant one-time tax item”, according to Baird analyst Colin Sebastian.

CNBC’s Jim Cramer was particularly quick to jump to the defence of the stock, saying that the loss was due to the company’s growth intentions. During Q2, Shopify laid out plans to spend $1bn to set up US fulfilment centres that could eventually rival the likes of Amazon.

Shopify offered guidance for Q4, which shows that the company expects revenue to come in between $472–482m — representing a year-over-year increase of 37% or 40%.

Consensus on Q4

The market expects Shopify to deliver a decline in earnings on higher revenues when it reports Q4 results, according to Zacks Equity Research. Earnings are expected to come in at $0.23 per share for the quarter, while revenues are expected to be $482.26m, up 40.3% from a year-ago quarter.

Shopify share price vitals, Yahoo Finance, 11 February 2020

“A powerful factor that might influence [Shopify’s] near-term stock price is how the actual results compare to these estimates,” according to the firm.

Last week, Barclays reaffirmed its hold rating on Shopify’s share price. The firm has a $420 target price on the platform’s stock. Meanwhile, Zacks Investment Research upgraded shares of Shopify from a hold rating to a buy on 22 January. The firm’s share price target for the platform is $495.

Elsewhere, Shopify has its price target boosted by Credit Suisse Group from $370 to $450 earlier in January.

The current consensus among 30 analysts polled by CNN is to hold stock in Shopify, while the median 12-month consensus share price target among 26 analysts is $415. The figure represents a -12.3% decrease from 6 February’s closing share price, of $472.98.