Shopify (NYSE:SHOP) stock – alongside the rest of the tech sector – has fallen off a cliff in September, with shares falling about 25% off their early September highs. While red-hot SHOP stock was due for a pullback after a meteoric run higher since March, this sell-off has now gone too far, and it is finally time to step in and buy the dip.
There are four big reasons.
- The big-picture, long-term fundamentals underlying Shopify remain strong.
- Near-term growth trends – despite consumer behavior normalization – remain favorable.
- SHOP stock’s valuation is now discounted relative to the company’s growth prospects.
- The technicals point to a near-term bottom forming in the near future.
Here’s a deeper look.
Shopify’s Fundamentals Remain Strong
Nothing has changed about Shopify’s big-picture, long-term fundamentals in September.
Consumers are still migrating from shopping offline to shopping online. Small-to-medium sized businesses – many of whom didn’t have an online presence prior to the novel coronavirus – are still migrating rapidly to the online channel, and building out e-commerce shops. Shopify is still the number one e-commerce platform in the market, providing best-in-breed solutions to help these SMBs succeed online.
The opportunity is still huge, with Shopify accounting for 1.7% of global e-retail sales last year, yet retail trade businesses in the U.S. accounting for 35% of total online retail trade sales. Gross margins are still strong up around 60%. And the opportunity for Shopify to drive enormous profit growth over the next 5 to 10 years remains compelling.
In other words, this is still one of the market’s best growth companies.
The only thing that has changed is that the SHOP stock price is 25% lower than where it was two weeks ago.
Near-Term Growth Trend Is Still Favorable
There’s some concern out there that as Covid-19 hysteria fades and consumer behavior normalizes, Shopify’s growth trends will moderate since consumers will be doing more shopping in the offline channel in Q3/4 than they did in Q2.
Sure. That’s true. But the moderation will be minimal, because other near-term trends surrounding Shopify remain highly favorable.
For example, many retail stores will be closed on big shopping days this holiday season, on the idea that big holiday shopping days attract huge crowds and 2020 simply isn’t a year for crowds. At the same time, many consumers will likely be hesitant to do holiday shopping in-person – even if stores are open – because it will be winter. Everyone seems to have a cough during winter, and nobody wants to be around sick people in 2020.
Overall, then, most holiday shopping this year will be done online. That’s a huge tailwind for Shopify in Q4.
At the same time, you have the whole social-commerce catalyst. Over the past few months, Facebook (NASDAQ:FB) has been aggressively expanding its footprint in commerce, by rolling out DTC shopping features on Facebook and Instagram. Shopify has been the technology backbone behind all of Facebook’s e-commerce initiatives – so, in effect, as goes Facebook’s social commerce efforts over the next few quarters, so will go Shopify’s growth trends.
All in all, then, the near-term growth backdrop still remains highly favorable for SHOP stock.
Shopify Stock Is Undervalued Now
The biggest problem with SHOP stock a month ago was that it was overvalued.
But now that some air has come out of the wheels, SHOP stock is actually undervalued.
My numbers suggest that Shopify has an opportunity to grow earnings per share toward $55 by 2030, which – based on a 35 times forward earnings multiple and an 8.5% annual discount rate – equates to a 2020 price target for SHOP stock of ~$925. Thus, around $860, Shopify stock is undervalued relative to the company’s long-term profit growth potential.
Admittedly, I’m very bullish on Shopify’s opportunity to turn into the near-ubiquitous technology backbone of SMB e-commerce. I’m equally bullish on the idea that most shopping of all sorts will be done online by 2030. This thinking obviously influences my long-term modeling on Shopify, and leads to a higher price target for SHOP stock.
But I’m also not alone in that thinking.
The average sell-side price target on SHOP stock today hovers north of $1,100 – almost 30% above today’s prices.
Technicals Point to Near-Term Bottom
From a technical perspective, it looks like the sell-off in SHOP stock may come to a close soon.
The Relative Strength Index – or RSI – on Shopify stock is rapidly closing in on 30, which is traditionally considered oversold territory. Historically, whenever SHOP stock’s RSI plunges below 30, the stock usually proceeds to level off and rebound over the coming weeks.
At the same time, SHOP stock now trades roughly 25% off recent highs. Looking back over the past five years, Shopify’s sell-offs usually hover around the 20% to 30% range. Thus, if SHOP stock were to bottom here, this sell-off would be in-line with prior sell-offs in the stock – and that seems to make sense, given that nothing has changed about the company’s big-picture fundamentals.
Overall, then, the technicals imply the worst of this sell-off in SHOP stock is over.
Bottom Line on SHOP Stock
Shopify stock is a a long-term winner. Near-term growth trends remain favorable. The valuation is attractive. The technicals point to a near-term bottom forming soon.
What more do you want?
Don’t over-complicate this one. Just buy the dip in SHOP stock.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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