Bull of the Day: Shopify Inc. (SHOP)

Shopify SHOP shares shined long before the pandemic forced more businesses and shoppers down the e-commerce route. The Canadian firm posted another strong quarter at the end of July and its outlook remains impressive inside an industry with plenty of growth runway left.

SHOP Necessities

Shopify helps companies of all shapes and sizes build, maintain, and grow their e-commerce footprints. Its business model is rather straightforward and provides what it calls “essential internet infrastructure for commerce,” including everything from site design and marketing to payments and shipping.

SHOP’s most basic package starts with a monthly fee of $29 for sellers and a 2.9% transaction fee. Shopify makes money from recurring subscription fees and a slew of various add-ons that help run many other essential business functions. SHOP’s point-of-sale products and software have gained momentum as well, competing against the likes of Square SQ.

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Shopify boasts that it powers over 1.7 million businesses in more than 175 countries. The company offers different tiers, with some aimed at entrepreneurs, as well as small and medium businesses. Meanwhile, its solutions are robust enough to support high-volume merchants and big businesses that include the likes of Heinz, Allbirds, and many others.

SHOP has partnerships with heavyweights such as Walmart WMT and Facebook FB. The company went public back in 2015 and it grew rapidly for years before the pandemic. In Fact, 2019’s 47% sales growth marked its slowest since its IPO.

Recent Performance and Outlook

SHOP’s covid-boosted 2020 revenue skyrocketed 86% from $1.58 billion to $2.93 billion. Shopify then crushed Q1 estimates and posted blowout second quarter financials on July 28 that saw its quarterly sales cross the billion-dollar threshold for the first time.

Revenue jumped 57% to $1.12 billion, with the subscription unit up 70% and merchant solutions 52% higher. Shopify’s adjusted earnings soared over 100% to $2.24 a share.

The company has now topped our EPS estimates by an average of 110% in the trailing four quarters and analysts raised their long-term bottom line projections following its report. Zacks estimates call for its FY21 revenue to jump 58% from $2.93 billion to $4.61 billion, with FY22 ready to surge another 33% to $6.14 billion.

Fiscal 2022 is set to mark a slowdown in terms of percentage-based growth, but that’s what happens as the numbers get bigger. Instead, investors should focus on the likelihood Shopify’s 2022 sales will come in $1.53 billion higher, which is nearly as much as the company’s full-year revenue in 2019 ($1.58 billion).

Shopify’s adjusted earnings are projected to climb by 15% this year and another 12% in FY22. And some of the most recent EPS estimates Zacks has call for far larger bottom-line expansion.

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Other Fundamentals

SHOP shares went on a stellar run long before the pandemic, crushing everyone from Nvidia NVDA to Amazon AMZN. It surged from under $30 a share in 2016 to over $500 before the coronavirus crash. Luckily the stock has cooled down a bit since its initial post-covid surge, up around 40% to lag Target TGT and come much closer to the broader tech space’s average.

Shopify stock had regained momentum along with other pandemic winners since mid-May. But it’s fallen 10% from its July records. The recent pullback pushed it below neutral RSI levels (50) at 47. The stock is also currently hovering right around its 50-day moving average. And it’s trading at a 30% discount to its own year-long highs in terms of forward sales.

The tech firm boasts an impressive balance sheet with $7.8 billion in cash, equivalents, and marketable securities against $1.83 billion in total liabilities. Its strong financial footing will help it continue to grow, while pursuing new areas and even possibly support an acquisition.

Bottom Line

Shopify’s EPS revisions positivity helps it grab a Zacks Rank #1 (Strong Buy) right now. And 16 of the 29 brokerage recommendations Zacks has are “Strong Buys,” with only one “Sell.” There could be some near-term selling pressure given SHOP and the market’s huge run.

Still, investors with long-term horizons might want to consider adding Shopify stock for its ability to thrive in a booming growth sector. And e-commerce is far from its peak, considering it accounted for only 13.3% of total U.S. retail sales in the second quarter, down from a record 16% in Q2 FY20.

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Post Author: Adam Jacob

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