Shopify (SHOP): Stock Evaluation Contest Winner

Cabot Professional Stock Evaluation Contest Winner! Thanks to Enrique B. for submitting this week’s pick, Shopify (SHOP).

If you would like a complete evaluation of your stock pick, please visit our Contest Page.

Shopify (SHOP) stock has been one of the leading glamour stocks of the 2016–2017 bull market. The company’s cloud-based commerce platform allows small- and medium-sized companies to design, set up and manage online shops, giving them access to much larger markets than would otherwise be possible. The company’s client list even extend to big companies and brick-and-mortar stores. Entrepreneurs pay just $29 per month, while larger customers can pay as much as $2,000 per month. The company’s services are now used by more than 500,000 stores in 174 countries, up from 375,000 at the start of 2017.

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Revenue growth has been excellent over the years, with a 112% gain in 2013, 109% in 2014, 95% in 2015, 90% in 2016 and 75% in both the first and second quarters of this year. The company is not yet profitable, as it has been plowing its free cash into growth, but it’s nearing breakeven and is expected to turn its first full-year profit in 2018.

Here’s a weekly chart showing the performance of SHOP stock since June 2015. You can see the stock’s remarkable advance from 19 in February 2016 to 124 last month.

Shopify (SHOP)

The dip at the end of the Shopify chart is a correction caused by a negative report from Citron Research, a company that specializes in shorting stocks (betting against them) and then releasing negative news about them. The stock dipped to below 90 immediately after the report, but has recovered to around 98. There’s no way to know what the long-term effects of the short-seller’s attack will be, but investors appear to be sticking with it for now.

The more important factor in SHOP’s performance will be the company’s third-quarter earnings report, which will be released in early November (no confirmed date yet).

SHOP has been damaged by the negative report, but a good earnings report will likely earn forgiveness from investors. If you buy now, keep it small ahead of earnings.

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Shopify (SHOP) Tech stock that’s revolutionizing online shopping

In Wall Street’s Best Investments, I recently featured Shopify (SHOP or SHOP.TO), a tech stock idea contributed by Patrick McKeough, editor of Stock Pickers Digest. Shopify is an online shopping site that’s seeing exponential growth. Online sales last year are estimated at $53 billion—about 62% of total retail sales. Overall, e-commerce sales grew 17% last year, with Amazon’s rising 27.2% to $43.96 billion, according to Kantar Retail for Stores—outpacing all of its competitors combined!

The National Retail Federation predicts that non-store sales will grow 8% to 12% in 2017, compared with a projected 3.7% to 4.2% growth rate for the retail industry (excluding automobiles, gas stations and restaurants).

Of course, this expansion is taking place at the expense of the bricks-and-mortar retail industry, which seems almost daily to suffer another blow. Just in the past few months, many major retailers have announced mega store closings, including:

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And that’s great news for Shopify, not to mention anyone who owns shares in this burgeoning tech stock. The company allows businesses and individuals to create online stores, using a series of plugins and themes. Shopify then hosts the online stores, providing payment processing, design and other management services.

As Mr. McKeough notes,

“Shopify’s software allows its merchants to set up both permanent and temporary retail and stores and also web, mobile and social-media platforms. The software gives merchants a real-time snapshot of their entire business, including inventory, shipping and payments.

“The company charges monthly subscription fees of $29 to $179. It also charges for each credit card transaction: With the $179-a-month unlimited plan, the fee for each transaction is 2.25% + $0.30. That’s on top of the regular credit card fees the merchant already pays.”

“For its September 30, 2016 quarter, Shopify saw its revenues grow by 88.6%, to $130 million and its losses shrink to $1.8 million, or $0.02 a share, from $2.4 million, or $0.03. At the end of the period. the company had cash of $400.3 million, or $5.00 a share and no long-term debt.

“Its high spending on research (20% of its revenue, or $19.5 million in the latest quarter) makes it appear less profitable than it really is, but helps it stay ahead of changes in the industry. For example, it has launched a mobile app that lets a merchant set up and run an entire business from a mobile phone.

“The company’s software integrates easily with major online retail sites such as Amazon.com and Apple.”

In the third quarter, Shopify had 325,000 clients in 150 countries, including Procter & Gamble(PG), Tesla Motors (TSLA), Budweiser and Google (GOOG). That figure grew to 375,000 in the fourth quarter, significantly higher than the 243,000 in the fourth quarter of 2015.

And fourth-quarter revenue continued the upward trend, rising 86% from the previous year, to $130.4 million, with subscription sales up 63% to $56.4 million. And net losses declined to $0.4 million, down from $1.1 million in the fourth quarter of 2015.

This year, the company anticipates revenues from $580 million to $600 million and adjusted operating losses from $18 million to $22 million.

As Mr. McKeough notes, the Shopify platform is well designed for use on mobile devices such as phones and tablets. And with the recent announcement that Shopify would be partnering with Amazon (AMZN) in the payments business, it looks like ‘full steam ahead’ for the company. Further, Shopify estimates that there are 46 million entrepreneurs that want to run their own online stores. That’s a huge amount of potential, making SHOP an interest tech stock candidate.

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Shopify (SHOP): Recent IPO building launching pad

By Michael Cintolo, Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader
From Cabot Wealth Advisory 10/8/15 Sign up for Cabot Wealth Advisory—it’s free!

So where do you find such potential winners? Recent IPOs (initial public offerings) are a great place to look. As newly public stocks, they have more potential upside as institutional investors build positions. Plus, these companies tend to be early (sometimes very early) in their fundamental growth phases, which of course can lead to huge long-term moves if conditions remain solid and if management pulls the right levers.

One recent IPO that I’ve written about in a prior Cabot Wealth Advisory is Planet Fitness (PLNT), but I’m not buying it yet because the chart has turned sloppy. PLNT looked ready to get going a week ago, but actually fell down the stairs late last week as the market rallied. So it’s still on my back burner.

Shopify (SHOP) is another recent IPO that’s caught my eye. Here’s what I wrote about this high-potential company in Monday’s Cabot Top Ten Trader:

“Shopify is a company few have heard of, but chances are, many of you have used it at one time or another. The company’s cloud-based software platform is the backbone of e-commerce efforts for more than 175,000 businesses today (including Facebook and Tesla Motors, although it mainly targets small and mid-sized companies); it helps firms build and manage websites, process payments and sell goods across multiple channels (social media, mobile, etc.). Business has been great, but Shopify is strong thanks to a slew of positive announcements lately, the biggest of which was the selection of Shopify as the e-commerce provider for Amazon Webstore merchants—this could bring in thousands of new customers and boost usability for many current customers that use Amazon. The company has also broadened its appeal recently by making it easier for merchants to sell on Twitter and Facebook, allowing for Apple Pay payments and making it easier to buy and print shipping coupons from the U.S. postal service. Revenue growth has been rapid, with all aspects of the business following suit—gross merchandise volume flowing through its customers’ sites was up 100% in the second quarter (to $1.6 billion), with Merchant Solutions (driven by payment volumes) up 140% and a 67% gain in monthly recurring revenue from subscriptions. Earnings are still in the red as the company reinvests in the business, but there’s little doubt cash flow will surge as the firm gains scale. We like it.”

The stock came public in May and, after a rally to 40 in early August, it’s etched a decent-looking launching pad. I’m not opposed to nibbling here, but again, starting slow and adding as the market gets going makes sense in this still-tricky environment.

To know when to buy (and how to handle) potential big winners like SHOP, you should give my Cabot Top Ten Trader a try. There’s no risk, and we have a history of getting our subscribers into the best stocks during every uptrend (and out of stocks when the market turns ornery)

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