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In addition, it seems that this dip is only temporary. For example, the Shopify share rose 5.7% on Friday, February 28, when most shares were down.
Investors should consider taking advantage of this opportunity. In fact, it looks like revenue and revenue will do well during all the downturns caused by the coronavirus outbreak. The most basic reason for this is that people are more likely to buy goods online on sites like Shopify.
Revenue and earnings Surprise upwards during the fourth quarter
An important reason why the Shopify share has done so well recently is its latest earnings report. Shopify’s fourth-quarter revenue increased 47% to $ 505.2 million, well ahead of the $ 482.5 million market forecast.
In addition, net income was positive for the first time at $ 771,000, or one percent per share. This compares with a net loss of $ 1.5 million or one percent per share a year ago. On an adjusted basis, the EPS was 43 cents, which was also well ahead of the street estimate of 23 cents.
Shopify also had very positive prospects for both 2020 and Q1 2020. They expect revenue for the year to increase by 36% in the middle of their guidance.
However, this guide from Shopify was on February 12, long before the latest coronavirus outbreak. That’s why the Shopify share took a hit from its peaks.
Concerns remain over Shopify’s high valuation
At today’s price, the Shopify share has a market value of $ 54 billion. This is a stratosphere 34 times its last 12 months’ revenue of $ 1.578 billion for 2019. In addition, it is also 25 times the expected midpoint of $ 2.15 billion for the first quarter of 2020.
So there is no room here in that valuation for performance issues. And the corona virus could clearly dispel some difficulties for Shopify.
In addition, a new article in Seeking Alpha points out that Shopify shares are traded at a premium to public SaaS companies.
For example, Workday (NASDAQ: WDAY) trades at an EV / sales ratio of 11.6 times over the next 12 months. Paycom Software (NYSE: PAYC) is 22.5 times sales and ServiceNow (NYSE: NOW) is 17.9x. These are lower than Shopify’s 33 times EV-to-sales ratio in the last 12 months.
Other issues facing Shopify’s merchants
Shopify makes two general types of revenue. It provides an e-commerce software solution for merchants. About 36% of sales come from subscriptions from merchants who start their online stores on Shopify.
But 64% of revenue comes from charging a fee derived from Gross Merchandise Volume (GMV). In other words, they get a cut of every sale.
The problem here is that many merchants order their goods from China and the Far East and then sell them on Shopify. Their access to goods has recently been disrupted by the general shutdown in China.
For example, CNBC recently reported that Amazon’s third-party sellers are struggling to keep their stocks in stock as a result of the general economic shutdown in China. The point is that many of these sellers are also Shopify merchants. In any case, Shopify merchants will have the same problem.
The point is that Shopify’s GMV will probably hit during Q1 2020 and possibly longer. It depends on how long it takes China to get started, so to speak.
This can cause some Shopify merchants to find other vendors or even create their own sales sites. Both of these will lead to lower revenues for Shopify in the long run.
What is Shopify doing to address the concerns?
Shopify addresses some important issues facing its online retailers. First, the company has launched the Shopify Fulfillment Network, which will compete directly with the Amazon Fulfillment Network, which is operated by Amazon (NASDAQ: AMZN). This enables Shopify to order stock from multiple sources and store them in Shopify warehouse.
This will dramatically reduce delivery times for Shopify merchants. For example, the typical Shopify retailer works with a delivery method to obtain its stock from China and other suppliers in the Far East. Right now, that is the reason for delays in deliveries.
With Shopify Fulfillment Network, the seller can pre-order stock, have it sent to Shopify’s warehouse and then have the order sent out to customers much faster.
Shopify indicated in their latest issue that they scaled up the Shopify Fulfillment Network. It bought 6 River Systems last year to develop robotic warehouses just like on Amazon.
As a result, Shopify merchants, many of whom also use the Amazon Fulfillment Network, are likely to have lower costs and more choices about how to order and complete their orders and deliveries.
What should I do with Shopify Stock?
The Shopify share is at a temporarily low level that is unlikely to hold, given the enormous growth it is expected to have next year. Some analysts believe that Shopify is growing so fast that its valuation is not so high given the growth curve.
In addition, when Shopify’s huge investments are over with the Shopify Fulfillment Network, the free flow and profits are likely to increase. That’s exactly what happened to its rival Amazon.
Do not be confused. Shopify warehouse is not a value warehouse. There is not much safety margin. It’s a classic momentum stock, but so was the Amazon stock during most of its huge upswing. In fact, the idea is that Shopify will grow into its valuation. If you think so, you can take a look at the Shopify stock while trading at these levels.
At the time of writing, Mark Hake, CFA holds no position in any of the above securities. Mark Hake runs the Total Yield Value Guide which you can review here. The guide focuses on high total return values. Subscribers a two-week free trial.