Shopify Is Crushing It, But SHOP Stock Is Set to Be Crushed


There's no denying Shopify (NYSE:SHOP) has shocked the world. SHOP stock is up more than 165% in 2019, and Shopify stock has rallied an incredible 2000% since its 2015 IPO by doing what many said can't be done. That is, penetrating an e-commerce market dominated by Amazon (NASDAQ:AMZN).

Source: Shutterstock

SHOP's magic formula has been behind the stratospheric surge of SHOP stock. That formula involves empowering online merchants with tools and information that eBay (NASDAQ: EBAY) and Amazon don't exactly want their sellers to have. The fact that 5,300 companies are using Shopify's products shows that it's got what businesses want.

The enthusiasm of the owners of SHOP stock is understandable.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

The huge rally of Shopify stock in just the past few months, though, has left SHOP stock uncomfortably vulnerable to profit-taking and short-selling. Shopify's growth doesn't justify the current valuation of SHOP stock.

Shopify Validates the Business Model

For ages, investors have argued about how far into the future they should look.

Amazon is the obvious poster child for an answer along the lines of "many, many years." It was a habitual money loser since its inception in 1994, and didn't start turning consistent profits until 2015. But, now that it's in the black, it's tremendously in the black.

Shopify may well be on a similar path.

There's a dangerous difference between Amazon then and Shopify now, however. Then, it wasn't entirely clear that e-commerce could ever be profitable. Now, with the industry fully matured, it clearly can be profitable. As a result, many companies with new approaches will enter the sector, while established players like Walmart (NYSE:WMT) are stepping up their game.

SHOP, in fact, is one of those newcomers. It's the un-Amazon. It's not even eBay facilitating the establishment of truly independent e-commerce platforms.Others will follow.

Shopify Stock Really Does Have a Valuation Problem

This competition won't be problematic for Shopify stock, though. Indeed, even though Shopify's 10% share of the all-in-one e-commerce platform market is less than that of WooCommerce's and Squarespace, SHOP has arguably already won the battle for mind-share. It should be the market leader, sooner or later.

As of the most recent look, however, SHOP stock, with a market cap of $44 billion, is valued as 34 times its trailing 12-month revenue of $1.3 billion. That's not 34 times its earnings, to be clear, which would be considered frothy by most standards. That's 34 times revenue

SHOP stock reached that huge valuation even though SHOP wasn't consistently profitable until last year. Based on this year's projected profit of $69 million, SHOP stock is valued at 637 times SHOP's earnings.

That's not necessarily the end of the world. Shopify is a work in progress. The market has rewarded less successful names, with less promising prospects.

But the point where the current SHOP stock price of $369 will be justified is so far down the road that it can't actually be seen. The 2021 outlook for revenue of $2.7 billion and net income of $218 million still leaves Shopify stock valued at 16.3 times the company's sales and more than 200 times its earnings.

On average, stocks are valued at three times companies' revenue, and between 15 and 20 times their earnings.

Most people don't realize that the current valuation of Shopify stock isn't justified. It's all based on hype, rooted in the premise that somebody finally figured out how to beat Amazon at its own game. Shopify would have to obliterate its estimates for the next several years to justify the current price of SHOP stock (let alone a higher price) at a time when competitors are improving their own products.

The Bottom Line on SHOP Stock

I'm not suggesting SHOP stock is destined to immediately roll over and lose a big chunk of its value.

It's entirely possible - even likely - we're at the start of something of a melt-up, as the fear of missing out on continued rallies by Shopify stock pulls more buyers into the incredible rally. Things like fundamentals don't matter until the majority of traders decide they matter, and right now, they don't matter for Shopify stock. A short squeeze may also be in play, artificially pushing the shares higher.

Make no mistake though. Every stock always eventually reflects tangible value. Even on a risk-adjusted, potential-adjusted basis, SHOP stock is already in jeopardy.

Tread lightly.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site,, or follow him on Twitter, at @jbrumley.

The post Shopify Is Crushing It, But SHOP Stock Is Set to Be Crushed appeared first on InvestorPlace.


More Related News

Gift Guide: Gifts for the commuters in your life
Gift Guide: Gifts for the commuters in your life

Need help with gift ideas? Spurred by ubiquitous broadband and mobile connectivity, lighter and smaller computers, and everything you need in the cloud, a lot of people have felt a lot less of a need to be in the same physical space as everyone else, day in day out, to get things done.

Amazon just released
Amazon just released 'The Expanse' season four a few hours early

If you were planning to dive into season four of The Expanse later tonight, then you may need to adjust your plans -- it's available on Amazon Prime Video right now. Following the early release of Jack Ryan in October, Amazon has posted up its first original season of the show it saved from cancellation. Unlike the Syfy broadcast, this one is a bingeable full season drop so you can jump through all ten episodes right away. This release is coming so early that a pre-release marathon of the three previous seasons is still ongoing over at Twitch. Apparently the early drop is becoming Amazon's move -- we'll see if Netflix ever recreates its surprise primetime Orange is the New Black season...

'The Marvelous Mrs. Maisel' Renewed for Season 4 at Amazon in Wake of 'Most Watched Opening Weekend Ever'

Amazon is demanding another encore from The Marvelous Mrs. Maisel: The streamer has renewed its crown jewel comedy for a fourth season. The pickup comes less than a week after the launch of Mrs. Maisel's eight-episode third season, and just days after the series scored multiple Golden Globe and Screen Actors Guild nominations. An episode […]

Amazon secures rights to show Champions League in Germany
Amazon secures rights to show Champions League in Germany

American retail giant Amazon has secured rights to stream Champions League games in Germany from the 2021-22 season, while current broadcaster Sky has been left empty handed. Amazon Prime Video will show Tuesday games from Europe's premier soccer competition. ''We are excited to show our

Brazil paves highway to soy, sparking worries about Amazon
Brazil paves highway to soy, sparking worries about Amazon
  • World
  • 2019-12-12 15:04:30Z

Night falls in Brazil's Amazon and two logging trucks without license plates emerge from the jungle. "There was a dream of colonization, of getting land and seeing if here we could have better financial conditions," Dedé Diniz, 69, said in his home.

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply


Top News: Economy