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What's dragging on Shopify's share price?

2020 has been a runaway success story for Shopify’s [SHOP] share price. The stock rode a March intraday low of $305.30 to climb as high as $643.19 by the end of April.

The growth in Shopify’s share price has continued at pace since, reaching an all-time high of $1,134.32 at close on 1 September, marking a 185.3% year-to-date increase.

However, the story of Shopify’s share price has become more complicated since then.

On 17 September Shopify’s share price hit $870.76, a 23.2% fall from its 1 September peak and the lowest price the stock has seen since 18 June.

Despite recovering to close at $970.26 on 28 September, Shopify’s share price was in freefall throughout much of the month, teetering above $900, and failing to regain the $1,000 mark since 3 September.

So, why aren’t investors buying into Shopify’s share price?

 

 

Diverse sales

During the coronavirus pandemic, tech and e-commerce have been amongst the most resilient sectors, with the latter rising 31.8% to over $210bn in US sales during the second quarter.

Shopify, which sits at the meeting point between these two spaces, has weathered the pandemic particularly well.

The company sells out-of-the-box solutions for small- to medium-sized businesses, enabling them to easily set up trading operations online. Shopify covers everything from website design to fulfilment services, and it even has a business accounting product, Shopify Balance, on the way.

As small businesses the world over were forced to pivot online, Shopify was able to bridge the transition. Q2 revenues soared to $714.3m, a 97% increase on the same period last year. Merchant revenue solutions powered much of this increase, totalling $517.9m for the quarter, a 148% year-over-year increase.

$714.3million

Shopify's Q2 revenue - a 97% YoY increase

 

Adjusted earnings per share for the quarter stand at $1.05, more than 100 times the $0.01 per share expected by the analyst community. Consequently, investors splurged on the stock, and Shopify’s share price ballooned towards the highs seen in early September.

In recent weeks, Shopify’s share price has begun to fall as the firm has diluted its shares, announcing the creation of 1.1 million new shares to generate $990m cash on 15 September. This alone doesn’t explain the slump, however, as individual investors will only see a sub-1% dilution, Rich Smith wrote in The Motley Fool.

However, signs that Shopify are looking to spend the money it creates on expanding the business seem to have spooked some investors, who, according to Smith, fear that the company could “diworsify” away from the core products that drove its success in the first place.

Investors may also feel that the conditions behind Shopify’s success are beginning to wear off. News in early September that the US unemployment rate had fallen by 8.4% hit a range of tech stocks that had been performing well in the unusual economic conditions of 2020.

With much of the world as adjusted as it is ever likely to be to the “new normal”, how much more growth can Shopify’s share price, and other, similar companies, really expect if the “old normal” is on its way back?

One way or another, enough investors seem to have decided that now is the time to cash in on their investments to precipitate a sharp fall in Shopify’s share price.

 

The analysts’ view

None of this is necessarily bad news for Shopify. The recent fall in price means that now is potentially a great time to buy Shopify shares, David Learner suggests in Seeking Alpha.

Generally speaking, the analyst community is a little more cautious. Among those polled by CNN Money the consensus is to Hold the stock. Of the 32 analysts, 11 recommended Buy, two Outperform and 17 Hold, with Underperform and Sell ratings given by one analyst apiece.

The median target from 26 analysts offering 12-month forecasts surveyed was $1,150, a 12.12% increase on 29 September’s closing price The low target of $850, 17.1% below the latest price, suggests that some analysts fear the stock could continue to lose value. However, the high target of $1,400 – 36.5% above the latest price – suggests that the optimism still greatly outweighs the pessimism.

 

Market Cap$124.759bn
EPS (TTM)-0.58
Operating Margin (TTM)-4.27%
Quarterly Revenue Growth (YoY)97.3%

Shopify share price vitals, Yahoo Finance, 30 September 2020

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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