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Is Shopify a Good E-Commerce Stock to Buy?

This year, Shopify (SHOP) has been pushed along nicely by a tailwind generated by the unusual market conditions caused by a global pandemic. The stock has garnered triple-digit gains so far this year. This impressive price performance is backed by substantial revenue and earnings growth. As international trade recovers from the deep economic slowdown wrought by the pandemic, SHOP’s strategy to expand overseas should allow the stock to reach new highs soon.

Shopify, Inc. (SHOP) is an up-and-coming e-commerce platform. It has shattered records with its impressive growth rates. It primarily caters to small- and medium-sized businesses, allowing owners to exhibit and sell their products and services. Based in Canada, SHOP currently operates in 175 countries. The company has demonstrated its  resilience and the capacity to survive stiff competition from industry leaders.

SHOP has thrived in the e-commerce boom over the past year, generating triple-digit gains. While the pandemic tailwind accelerated its growth, we believe the company has sufficiently robust financials to survive a market pullback or tech sell off.

SHOP has gained 194% over the past year. This, along with several other factors, has helped the stock earn a “Strong Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates SHOP:

Trade Grade: A

SHOP is currently trading above its 50-day and 200-day moving averages of $1,004.69 and $978.40, respectively, indicating a golden-cross uptrend. Moreover, the stock has gained 43.6% over the past six months, reflecting solid short-term bullishness.

SHOP generated more than $5.1 billion in transactions over the course of three days during the Black Friday sales (Nov 27th – Nov 30th), up 76% from the same period last year. In fact, the company’s sales for the week (Nov 23rd – Nov 30th) increased 84% year-over-year.

SHOP’s revenue has increased 96% year-over-year to $767.40 million in the third quarter ended September30, 2020. This can be attributed to a 48% and 132% increase in Subscription Solutions revenue and Merchant Solutions revenue, respectively, during this period. Gross Merchandise Value increased 109% from the year-ago value to $30.90 billion, while gross profit rose 87% from the same period last year to $405.10 million. EPS increased substantially from the negative year-ago value to $1.54.

Buy & Hold Grade: A

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, SHOP is well positioned. It is currently trading just 0.6% below its 52-week high of $1,164.17, which it hit yesterday.

SHOP has gained 999.9% over the past three years. This price momentum can be attributed to its impressive revenue growth. SHOP’s revenue and total assets have increased at CAGRs of 61.7% and 89.2%, respectively, over the past three years.

SHOP’s unique business model has made it one of the fastest growing e-commerce channels in the world, despite stiff competition from industry giants. Moreover, the company generally reinvests its earnings into the business, thereby paving the way for international expansion absent taking on mounds of debt. Since its inception in Canada 14 years ago, SHOP has expanded its operations to 175 countries, thereby increasing its revenue and earnings significantly.

Peer Grade: A

SHOP is currently ranked #1 of 37 stocks in the Internet – Services industry. Other popular stocks in this group are VeriSign, Inc. (VRSN), Stitch Fix, Inc. (SFIX), and Covetrus Inc. (CVET).

VRSN, SFIX and CVET have gained 11.8%, 158.6% and 114.2%, respectively, over the past year. This compares to SHOP’s 194% returns over this period.

Industry Rank: A

The Internet-Services industry is ranked #15 of 123 StockNews.com industries. While the technology transformation began well before the pandemic, the lockdown and social distancing necessitated by the pandemic this year expedited that transformation. With remote working and learning the new norm, the demand for cloud-based services has hit record highs this year. The e-commerce industry also capitalized from this trend, as the number of people shopping online has increased significantly too. Although the roll-out of a coronavirus vaccine has led to a pullback by major stocks in this industry, they are expected to bounce back quickly.

Overall POWR Rating: A (Strong Buy)

SHOP is rated “Strong Buy” due to its solid short- and long-term bullishness, impressive financials, and underlying industry strength, as determined by the four components of our overall POWR Rating.

Bottom Line

The e-commerce industry is already recovering from a November sell-off, which bodes well for SHOP. While the coronavirus vaccine deployment threatens the e-commerce boom, the overall convenience of shopping along at hefty discounts should allow this sector to retain its user base. Thus, SHOP has plenty of upside left as it undertakes several expansion strategies.

The consensus EPS estimate of $1.27 for the current quarter ending December 2020 indicates a 195.3% improvement year-over-year. The company has an impressive earnings surprise history as well, as it beat the Street EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $906.17 million for the current quarter indicates a 79.4% rise versus the prior-year quarter.

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SHOP shares were unchanged in after-hours trading Thursday. Year-to-date, SHOP has gained 196.80%, versus a 17.31% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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