If there is a sector that is thriving during this global crisis, it is online retailers. Shopify (SHOP) is up 35% since the market began to crash on February 20th. Now, there has been a recovery off the bottom in the general market, but Shopify has outdone the market on the recovery by over 100% as the stock set new all-time highs on the back of earnings today. As you can see below, the stock has worked wonders for “long-term” shareholders. I do not anticipate that the stock can keep its current pace up, but I do believe the online surge we have seen is going to continue well beyond the end of COVID-19. Assuming all of that isn’t already priced in, there will still be some money to be made, but I am cautious at these inflated levels.
How Were The Results?
Wednesday morning, Shopify released that over Q1 the company saw revenue hit $470 million. Not only does this beat expectations by $27 million, but this is 46.7% year over year growth which is pretty incredible. Hard to maintain that long term, but considering where the company is, very positive. The company also posted GAAP EPS of -$0.27. This also beats expectations by a whopping $0.50. Gross merchandise volume (GMV) was reported at $17.4 billion. This is a 46% increase year over year as well as a $0.57 billion beat. Over the quarter, the company observed Subscription Solutions revenue growth of 34% driven mostly by an increase in the number of merchants joining Shopify.
As you can see below, strong revenue growth is not new to Shopify and no one (should at least) expects them to continue growing at 60%+ a year. Based on the stock climbing 7% today on the backs of earnings, I am going to assume investors are pleased with 46% year over year growth. What will be interesting to watch for is when the number no longer becomes acceptable. There are some predictions that annual growth will fall below 40% this year. We will have to wait and see how the market reacts to that as those numbers are closer to what is expected for Amazon (AMZN) as well.
Shopify observed new store creations growing 62% between March 13 and April 24 compared to the 6 weeks prior. This is occurring as entrepreneurs are looking at new ways to access consumers in these difficult times. With new merchants, come new shoppers. There was an uptick of 8% over the same period when it comes to shoppers making their first purchase on Shopify. The number of consumers purchasing from a Shopify merchant they’ve never shopped at before also grew by 45% over the 6 weeks leading up. Shopify has extended its free trial on standard plans to 90 days, providing a healthy balance of existing businesses and new entrepreneurs setting up shop. This will no doubt weigh on Q2 results, but the long term reward could pay off in spades as long as the new stores find success on Shopify.
What Stands In Their Way?
The question that we do not have an answer to, is how sustainable is this growth. How much of this rapid growth is due to COVID-19? And how long will it last? The answers to these questions hide in market share. One of the ongoing challenges for the company is growing its market share. Shopify currently sits second to the giant Amazon (AMZN) but has risen above the likes of eBay (EBAY), and Walmart (WMT). The largest challenge for Shopify going forward is continuing to steal market share from these three giants. Amazon is not about to roll over and give any of theirs up as they are after more and more.
CFO, Amy Shapero had this to say regarding the rest of 2020:
We have a business model that puts merchants first, a fundamental strength as the world retools for lower touch commerce. We have a healthy debt-free balance sheet and a strong cash position and a proven disciplined capital allocation approach to ensure we can operate effectively even through what may be an extended recession. And finally, we have a long established and trusted network of partners working as hard as we are to support merchants now. As Shopify has always been a company of people that thrive on change and embrace hard problems, we are meeting this challenge head on, ready to learn from this collective experience and emerge from it better.
Because of the current state, Shopify did not provide any guidance with regards to the rest of 2020 or Q2. This falls in line with what we have seen across multiple industries. Shopify is focusing on what is going to make their merchants the most successful, which in turn will make Shopify successful.
What Does The Price Say?
I was calling for a price correction as late as February 14th, and we got exactly that thanks to COVID-19. I did not anticipate the 50% dip that we observed, but it was a great buying opportunity. There were two levels I was watching very closely. One was $320 and the next being $282. After the stock crashed through $409, the next stop was likely around $320. We can see below that both of these levels played important roles in the stocks decline.
As you can see, the stock has become incredibly volatile since the collapse, and that has not slowed down. But we can see these crucial levels of support have helped shape where we are today. If you were feeling risky and really confident in Shopify as a company, there was a great opportunity to buy below $409. I was waiting for the $409 to get tested and have a successful retest before breaking out again as I let the price make the final decision on any trades. Fundamentals are a great starting point, but if price can not confirm what is happening, then there’s no basis for an entry in my opinion.
If you nailed the bottom, you are currently sitting pretty with a 135% gain. It looks like the 50% decline shook out all the loose hands, as the stock has rebounded and then some to new all-time highs. I do not know how much more the price can run. I believe a lot will have to do with how long COVID-19 lasts, and what Q2 earnings look like. Looking below, we can see the short term trendline that has been established. This is a very, very steep trend. Looking below, you can see that the stock has traded right along its established trend lines over the past 18-months. I would expect some consolidation around these levels as we wait for more news. But because this is a growth stock and there’s some very clear momentum behind it, there is the possibility it continues to dart higher, and quickly.
In a perfect world, I would love to see this stock come back and consolidate around the February high while some of the fundamentals catch up a little bit before really lifting off and pushing for $1000. But as we have seen before, that is not always the case for these growth stocks. I would not personally buy the stock at these levels. I am giving Shopify a hold rating at this point. Given how much the stock has ramped up, there is a decent chance for another buying opportunity to show itself.
As you can see, Shopify delivered outstanding results yet again. The company is seeing large increases in new merchants due to the COVID-19 situation. The true test will come in Q2 and Q3 data when we see how much follow-through there is as life begins to return to some sort of normal and retail stores open up to the public again. If all the merchants that are taking advantage of the free-trial stick around, the stock will continue to soar. If there is some drop off in growth, the stock will get hit hard. The stock remains a hold for me at these levels.