Shopify (SHOP) stock has generated stellar returns of around 194.7% on a YTD (year-to-date) basis as of December 27. In comparison, the S&P 500 and the VanEck Vectors Semiconductor ETF have risen about 29.3% and 62.9% YTD.
On December 27, Shopify stock closed the trading day at $408.00—down 0.18%. The stock is trading 2.1% below its 52-week high of $416.60. Meanwhile, the stock is trading at 215.1% higher than its 52-week low of $129.48. At the closing price on December 27, Shopify’s market capitalization was $46 billion.
Shopify stock is rising
Overall, Shopify stock delivered impressive returns in 2019 until August. However, the stock started losing momentum in September. While the stock fell more than 19% in September, it gained 0.6% in October. Shopify stock picked up the pace after its third-quarter results. Notably, the stock has gained more than 30% as of December 27. The company had higher revenue guidance during the third quarter. On December 26, the stock touched a new high of $416.60 due to strong online holiday sales results.
So, what are the trends signaling? Should investors go long on Shopify stock amid strong online holiday sales results? Will the stock rally even after touching new highs? We’ll discuss the factors impacting the stock price.
Holiday sales report
According to the Mastercard SpendingPulse report on December 26, US retail sales (excluding autos) rose 3.4% YoY this holiday season. According to the report, the online retail sales grew 18.8% YoY during the holidays—up from 18.4% growth last year. Notably, online holiday sales reached a record high this year and accounted for 14.6% of the total retail sales. Mastercard’s senior advisor, Steve Sadove, said that retailers were responsible for the strong performance. Sadove thinks that retailers started omnichannel sales offerings earlier this season amid a delay in the Thanksgiving holiday.
Apparel sales also grew 1% YoY due to a better-than-expected 17% growth in e-commerce sales. The jewelry sector gained 1.8% and online sales grew around 8.8%. Electronics and appliances sales rose 4.6% YoY, while the home furniture category grew 1.3% this holiday season. Although departmental store sales fell 1.8% YoY, online sales increased 6.9%. Customers preferred to shop online more than visiting stores.
Strong e-commerce sales during the holiday season led to a spike in many retail stocks. Stocks like Shopify, Macy’s (M), Nordstrom (JWN), and Amazon (AMZN) rose 2.3%, 2.6%, 1.8%, 4.4%, respectively. Meanwhile, Walmart (WMT), Target, and Kohl’s stocks rose marginally on December 26.
Market Realist analyst Sharon Bailey thinks that customers are shifting more to online shopping due to convenience and competitive pricing. She thinks that department store sales are declining amid a highly promotional environment. As a result, departmental stores like Macy’s and Nordstorm are focusing on their digital channels and omnichannel offerings. Market Realist analyst Amit Singh pointed to some retailers’ super-fast delivery during the holiday season. Amazon, Walmart, and Target also had enough inventories to meet the high demand during the holiday period.
Shopify expands its fulfillment centers
Shopify provides a cloud-based e-commerce platform to help businesses build websites and sell goods online. The software-as-a-service provider allows companies to sell through channels, including mobile and social media, and brick and mortar storefronts. The company also offers digital payments and shipping services. Shopify has over 1 million merchants worldwide and earns subscription fees in return.
The e-commerce software firm wants to expand its fulfillment centers to attract more merchants. We noted that more fulfillment centers would help make delivery easier and faster. Notably, Shopify plans to spend $1 billion to set up many fulfillment centers in the US through 2023.
Shopify’s big expansion plans would also help it become more competitive with Amazon.com. Shopify’s acquisition of 6 River Systems would help it expand into the warehouse and logistics business and directly compete with Amazon. The addition of 6 River Systems would also help the company set up fulfillment centers in the US. Shopify expects to achieve the 6 River Systems acquisition to add around $30 million in annual revenues in 2020.
Meanwhile, higher investments in fulfillment centers would increase the company’s expenses and hurt the earnings. Nevertheless, Shopify is confident that it will drive sales and earnings growth ahead.
During the third quarter, Shopify incurred operating expenses of $252.4 million, which grew 39.4% YoY. The company posted an adjusted loss of $0.29 per share in the third quarter. In comparison, the company had earnings of $0.05 per share in the same period the previous year. Analysts expected profits of $0.11 per share.
Shopify has delivered sluggish revenue growth in the past. During the third quarter, the revenues grew 45% YoY. However, the growth rate was the slowest in the last four years. Shopify expects its revenues to improve in 2019. Jim Cramer is also optimistic about the company’s near-term growth prospects.
The company has raised its view on revenues and expects it to grow to $1.55 billion–$1.56 billion in 2019. Earlier, Shopify predicted revenues of $1.51 billion–$1.53 billion. The company also expects the adjusted operating income to be $27 million–$37 million for 2019. For the fourth quarter, Shopify expects revenues of $472 million–$482 million and an operating income of $10 million–$20 million.
Analysts expect Shopify revenues to grow 40.17% YoY in the fourth quarter and 44.88% YoY in 2019. Wall Street analysts expect the revenues to grow 35.52% YoY in 2020. For the fourth quarter, analysts expect the earnings to fall 9.3% YoY. Analysts also expect the 2019 earnings to fall more than 51% YoY. Meanwhile, they expect the company’s earnings to grow more than 100% in 2020.
Shopify trades at a premium
Shopify stock trades at a premium compared to its peers. The stock trades at a price-to-sales ratio of 22.44x in the next 12-month period. PayPal and Square trade at price-to-sales ratios of 6.19x and 9.59x, respectively.
Although Shopify stock trades at a premium, its revenue growth rate is also higher than its peers. In the December-ending quarter, analysts expect PayPal’s revenues to grow by 14.9%. However, Wall Street analysts expect Square’s revenues to grow by 41.6% in 2019. Overall, analysts expect Shopify’s revenues to grow by 44.88% in 2019.
Analysts’ recommendations on Shopify stock
Analysts have given Shopify stock a 12-month target price of $363.38. The average target price stands at an 11.6% discount to the current price at $408.00 on December 27. Among the 29 analysts covering Shopify, around 16 recommend a “buy,” 11 recommend a “hold,” and two recommend a “sell.”
Reading the technical levels
Shopify’s 14-day RSI (relative strength index) score is 72.86. The score indicates that the stock is in the “overbought” territory. Notably, if the RSI reading is over 70, the stock is considered “overbought.”
On December 27, Shopify stock closed near its Bollinger Band upper range level of $419.84. The value denotes that the stock is overbought.
Shopify stock was 8.0%, 20.3%, and 18.7% above its 20, 50, and 100-day moving averages of $377.69, $339.10, $343.63, respectively. Since the stock price is above the moving average, the stock has an upward trend. The technical indicators state that the company is overbought at the current level.
Strong holiday sales and higher revenue expectations for the December-ending quarter should draw analysts and investors’ attention. We don’t think that investors should let go of Shopify stock right now.