Is There More Upside in Shopify Stock?

Shopify (SHOP) stock fell around 3.8% on October 29, after the company reported disappointing third-quarter earnings before the market bell. However, investors soon turned bullish on the stock, erasing these losses. Shopify stock gained about 7.6% as of November 26 since the company posted its third-quarter earnings. Meanwhile, the stock has given stellar returns this year and gained about 142.8% on a year-to-date basis. Shares are also rising during the trading session on November 27.

Shopify stock closed at $336.19 on November 26 and gained more than 6%. At Tuesday’s closing price, Shopify trades at a market value of $39.3 billion. The stock is 17.9% lower than the 52-week high of $409.61 and 185.8% higher than the 52-week low of $117.64.

So, can Shopify stock continue to rise higher? Let’s look at the factors that are driving the stock. Investors should also look into the technical indicators to understand the trend.

Shopify has been delivering sluggish sales growth in the past many quarters. In Q3, revenues grew 45% year-over-year, but the rate of growth was the slowest in the last four years. However, Shopify has been making efforts to improve its platform and expand its user base. Shopify is also competing with rival Amazon (AMZN) on the delivery front.

Shopify has been investing in expanding its fulfillment centers to attract more merchants and making delivery easier and faster. Higher investments in fulfillment centers pushed up the company’s operating expenses. Nevertheless, we believe the investments would soon bear fruits and help drive sales and earnings growth.

CNBC’s host Jim Cramer also favors Shopify stock. In the TV show Squawk on the Street, Cramer stated, “They have a loss but they are spending money to grow,” said a CNBC report. Cramer also said, “I defy Shopify, defy the sellers of Shopify. You will regret that you sold it.”

Shopify has gained over 1 million merchants around the world and is gaining massive popularity among customers. In June, Shopify had planned to spend $1 billion to set up many fulfillment centers in the US through 2023. Per a report from The Observer, the Canadian startup company has grown rapidly and became the second most popular online shopping destination after Amazon.com. In terms of sales, Shopify has exceeded eBay (EBAY). In Q3, eBay sales remained flat at $2.65 billion from the year-ago quarter, while Shopify sales grew 45% year-over-year.

Plus, Shopify anticipates higher revenues next year. The company has raised its revenue outlook, and it expects it to grow to $1.55 billion–$1.56 billion in 2019. Earlier, the company had predicted revenues of $1.51 billion–$1.53 billion. The company also expects adjusted operating income of $27 million–$37 million for 2019. Analysts expect 2019 revenue to grow 44.88% year-over-year to $1.56 billion. Plus, Wall Street also predicts revenues to grow 35.52% year-over-year in 2020. For earnings, analysts expect a decline of over 51% in 2019. However, earnings should significantly increase by over 100% in 2020.

For Q4, Shopify expects revenues of $472 million–$482 million and an operating income of $10 million–$20 million. Analysts also expect revenues of $482 million in Q4, up 40.17% year-over-year. Wall Street is also expecting Q4 earnings to decline 9.3% year-over-year to $0.24 per share.

SHOP shares have been trading at a premium. Shopify stock is trading at a price/sales (or P/S) ratio of 18.90x for the next 12 months (or NTM). In comparison, Shopify peers PayPal (PYPL) and Square (SQ) trade at P/S multiples of 6.08x and 10.53x, respectively.

Though Shopify trades at a premium, its revenue growth rate is also higher than its peers. In the December-ending quarter, PayPal’s revenue growth expected is 14.9%. However, Square’s revenues are expected to grow by 41.6% in 2019. Shopify’s revenue growth is expected at 44.88% in 2019.

Around 16 out of 29 analysts have a “buy” rating on the stock. Eleven analysts have given it “hold” ratings, while only two analysts have a “sell” rating on the stock.

Shopify’s 14-day relative strength index (or RSI) score is 61.41, indicating that investors are neutral on the stock. Notably, the RSI number of above 70 indicates that a stock is in “overbought” territory, while an RSI level of below 30 means a stock is in the “oversold” area.

On November 26, Shopify stock closed near its Bollinger Band upper range level of $333.10. This value suggests that the stock is in overbought territory.

Shopify stock closed 7.8%, 6.4%, and 0.9% above its 20-, 50-, and 100-day moving averages of $311.93, $315.82, and $333.22, respectively. Since the price is above the moving average, the trend for the stock is upward. Looking at the technical numbers, I think the stock has upside potential, and investors should hold the stock right now.