Shopify's share price has seemed invincible for much of 2019. On 25 August, the stock closed at $406.99. An incredible 174.3% gain on the $137.60 it started the year with.
Comparisons to Amazon [AMZN] and two strong earnings reports drove this surge. Yet, post August a shift in market sentiment has seen the share price trend downwards.
A less than great Q3 earnings report raised questions as to whether Shopify’s [SHOP] share price is now overvalued. The stock carries a hefty forward 412.8X price to earnings multiple. And it is also trading above Yahoo finance’s 1-year price target estimate of $361.58
So, should traders jump on a (relative) bargain or ditch the stock?
Why investors should buy Shopify shares
Despite being around 7% off its all-time high, Shopify’s share price could be a good long-term bet.
This comes from its status as one of the biggest e-commerce brands on the planet. As the retail world changes, the demand for digital tools is increasing. Shopify’s products look a good match for a growing audience looking to start their own businesses.
Millennials - more than previous generations - want to start their own businesses. This has seen the proliferation of start-ups and small to medium sized businesses. According to Freshbooks, 15 million Americans are self-employed. By 2020, forecasts are for this figure to hit 27 million.
One thing Shopify will have to do is prove it can turn a profit. In the last quarter, the company had a -8.97% profit margin. Its EBITA came in at $-95.56 million.
How far Shopify's share price is off all-time highs
Obviously, these things take time. The fact is that Shopify's share price is sprinting ahead of the fundamentals. In the short-term, hype will continue to drive share price growth. That means those picking up stock now should expect to see a few more dips over the next 12 months.
So, for traders looking for a short-term scalp by buying the dip in Shopify’s share price, it may not be worth it. Those holding the stock over the longer-term however, could reap the rewards.
Why investors should sell Shopify shares
Traders like to buy a dip hoping for an upswing in price. But this could be one dip that keeps on going.
Shopify's share price had been one of the biggest e-commerce plays on the market. Yet, arguably, Shopify's product isn't unique enough. Sure, it has increased its fulfilment capabilities, but Amazon already offers that. It also has an online marketplace. But eBay’s got a more mature offering in that space too.
Shopify's share price is ferociously expensive. Looking at the books, there's no free cash flow and the company's in debt.
Shopify share price vitals, Yahoo finance, 09 December 2019
Year-on-year net income has fallen 61.4%, from -$40 million in 2017 to -$64.55 million in 2018. While it's understandable the company is spending to grow, more losses could cause a pullback in the share price.
In October, 3.58 million Shopify shares were being shorted. That number grew to 4.44 million in November. However, if the company can achieve their expected growth, relative to a sector average 35x forward earnings multiple, bears may start to fall away.
Traders will need to decide carefully before backing Shopify. The stock carries little in the way of safety margin. Any slip in growth could enhance the recent share price volatility. Profits, or at least, a reduction in losses, also need to happen. And with such a lofty valuation, it's likely that the market has already factored in plenty of growth.