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Is Shopify A Buy After Retreating To Long-Term Support?

Shopify (SHOP), the upstart challenging eBay (EBAY) and Amazon.com (AMZN), has a flashy new Google partnership as the pandemic fuels an online shopping boom. But is Shopify stock a buy right now?




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Shopify was started by snowboarding enthusiasts a decade ago. In fact, it started as an online snowboard shop, moving into e-commerce software when the founders couldn’t find what they were looking for — a platform to both sell goods and grow their brand.

Google, a unit of Alphabet (GOOGL), will let Shopify merchants show their products across Google’s platforms such as Search and Images, the internet giant said Tuesday. Shopify sellers also will link to Google’s Shopping Graph, a new tool that uses machine learning to gather video prices and reviews to better inform shoppers.

What Is Shopify And How Does It Work?

The e-commerce platform provider helps businesses set up shop online. BigCommerce (BIGC), a new IPO, is a close competitor. But tech stalwarts Google, Amazon (AMZN), Microsoft (MSFT), Adobe (ADBE) and Facebook (FB) have also made a push to provide e-commerce solutions for businesses.

Across 175 countries, 1.75 million merchants use the SHOP platform to sell and market their products. In return, the software company earns subscription fees. Subscriptions range from $29 per month for entrepreneurs to $2,000 and up for large companies. It also offers shipping, digital payments and fulfillment, under the umbrella terms of merchant solutions.

Shopify estimates it now has a 9% share of the U.S. e-commerce retail market — more than eBay (EBAY), Apple (AAPL) and Walmart (WMT), but below Amazon, which has a 39% share.

SHOP Earnings And Fundamentals

On April 28, the e-commerce software leader smashed earnings, revenue for the first quarter. Shopify earnings of an adjusted $2.01 per share included a $1.3 billion investment gain. Revenue jumped 110% to $988.6 million.

Analysts expected Shopify to report earnings of 72 cents a share on revenue of $860 million.

(Shopify)

Revenue from merchant solutions climbed 137% to $668 million vs. estimates of $560 million. Revenue from subscriptions rose 71% to $320.7 million vs. estimates of $284 million. Gross merchandise volume, or the total value of all goods sold on the Shopify platform, soared 114% to $37.3 billion vs. estimates of $32.54 billion.

Both merchants and consumers pivoted online during the pandemic, benefiting Shopify. But SHOP continues to withhold guidance for 2021 and to warn of slower revenue growth after a blowout year.

Shopify’s financial outlook continues to assume that “as countries roll out vaccines in 2021 and populations are able to move about more freely, the overall economic environment will likely improve.” It expects some rotation in consumer spending back to offline retail and “a more normalized pace” of e-commerce growth.

On key earnings and sales metrics, Shopify stock earns an unbeatable EPS Rating of 99, and an SMR Rating of A, on a scale of A-E, with A the best. The EPS rating compares a company’s earnings growth to other companies, and its SMR Rating measures sales growth, profit margins and return on equity.

Wall Street expects Shopify EPS to fall 1% in 2021 while revenue grows 43%, according to Zacks Investment Research. That reflects, in part, tough comps and investments in its business. In 2022, Shopify earnings are seen growing 27% as revenue jumps 33%.

Over the past three years, Shopify grew earnings 136% on average and sales 59%. Investors should generally look for stocks with sustained earnings and sales growth of at least 25%. So SHOP stock is far ahead on both counts.

The hot software stock has a 16% annual profit margin, the IBD Stock Checkup tool shows. Its 10% return on equity is under the minimum 17% that investors would want to see.


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Shopify Stock Technical Analysis

Shares have formed a deep cup base with a 1,499.85 buy point. Shopify stock surged 11% in late April on a big earnings beat. But after a tech-led stock market sell-off, the software stock sits 24% below the latest entry and right at its 50-day line, according to MarketSmith chart analysis. The current consolidation goes back to early February and follows two failed breakouts.

On April 28, the company renewed its caution that torrid growth won’t repeat this year. Several executive departures are another concern for Shopify stock.

The relative strength line for SHOP stock rallied for most of 2019 and 2020. However, it has made little headway this year. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.

Shopify stock earns a Composite Rating of 67 out of 99. The rating combines key fundamental and technical metrics in a single score.

Its 39 RS Rating means that its performance is in the bottom 39% of all stocks over the past year.

The Accumulation/Distribution Rating of C reflects roughly equal buying and selling by institutions over the past 13 weeks. As of March, 1,926 funds owned Shopify stock. In fact, SHOP shows eight quarters of rising fund ownership, according to the IBD Stock Checkup tool.


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Coronavirus Impact On Shopify Stock

In 2020, Shopify emerged as a clear coronavirus stock winner. The pandemic drove up online buying and selling, with more consumers and merchants turning to the Shopify platform.

Shopify is investing heavily to grow. In 2021, key areas of investment include the Shopify Fulfillment Network, the Shopify app and international expansion. It’s also integrating 6 River Systems, a 2019 acquisition that makes warehouse software and robots, into its distribution network.

Analysts call the company a structural winner from the pandemic boost to e-commerce. Sixteen analysts have a buy rating on SHOP stock, seven have a hold and one has a sell, per Zacks.

Goldman Sachs forecasts that global e-commerce will grow 19% annually over the next three years, up from a prior view of 16%.


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Spending On Shopify Tops eBay — Amazon Next?

Shopify has now surpassed eBay in gross merchandise volume. But it’s not itself a retailer. Rather, it provides merchants with the software tools to build websites for selling products and managing their business, under their own domain name and brand.

Shopify had several achievements in Q1:

  • It further built out Shopify Fulfillment Network, a service that uses software tools and deep learning to get orders to customers quickly and cost effectively. Shopify could break even on this $1 billion investment by 2023, analysts say.
  • It also grew programs to lend to businesses (Shopify Capital), and to help merchants mail online orders with less friction (Shopify Shipping).
  • It continued to develop Shop, its all-in-one mobile shopping assistant, alongside Shop Pay, its faster checkout tool, and the Shop App.

In 2020, Shopify forged a marketing partnership with viral video-sharing app TikTok. Earlier partnerships included Walmart, Facebook (FB), Pinterest (PINS) and well-funded startup Stripe.

Also last year, Shopify rolled out Shop Pay Installments, a “buy now, pay later” product. And it partnered with Alibaba (BABA) to allow U.S. merchants to get paid by more than 1 billion Alipay users in China. The new Google partnership, announced Tuesday, adds to the list and could be the most far-reaching yet.

Analysts at KeyBanc Capital Markets believe that Shopify could eventually levy an e-commerce fee from merchants, similar to Amazon.

However, more and more companies seek to provide e-commerce software services. Adobe acquired e-commerce technology firm Magento in 2018. Microsoft launched Dynamics 365 in 2019. Longtime Shopify partner Facebook introduced Facebook Shops and Instagram Shops in 2020.

In April 2020, Google began to allow merchants to sell their products on its platform for free, to help businesses out during the pandemic. In February, Amazon acquired Selz, a Shopify rival that helps small businesses to build online stores.


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SHOP Stock Group

Shopify belongs to IBD’s Computer Software-Enterprise group, which ranks No. 101 out of 197 industry groups. The enterprise software group has been a big winner, but recently investors shifted money into cyclical sectors such as mining, metals and financials.

During the coronavirus pandemic, enterprise software stocks emerged as winners because of remote working and learning.

Stocks to watch in this group include Salesforce (CRM), Twilio (TWLO) and Paycom Software (PAYC). Other members include ServiceNow (NOW), DocuSign (DOCU), Workday (WDAY) and Zoom Video (ZM).

Digital Turbine (APPS) and Dynatrace (DT) are also stocks to watch in this group. Many of these software companies are current or former IBD 50 stocks.

ServiceNow stock is on IBD Leaderboard, a curated list of stocks with the most potential for big gains.


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Is Shopify Stock A Buy Right Now?

Shopify ticks off many of the boxes that investors should be looking for. It was a big winner in 2019 and 2020, solidifying its threat to eBay and Amazon. Key acquisitions and expansions promise more runway for growth. New Google and Alibaba partnerships could significantly move the needle.

The software company boasts huge earnings and sales growth, which got a boost from the pandemic. That scorching pace of e-commerce growth is poised to normalize, while Shopify invests to grow. Wall Street expects SHOP earnings to decline, before rebounding in 2022.

After two failed breakouts, SHOP stock is basing but is far from a 1,499.85 buy point. Shopify stock is fighting for the 50-day support level and its RS line remains lackluster.

Bottom line: Shopify stock is not a buy right now.

For ideas about large-cap stocks to buy right now, check out the link.

To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD research.

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