A recurring theme that investors have taken advantage of over the past decade is the shift in consumer shopping habits towards digital marketplaces. The rise of e-commerce and online shopping has been swift and sharp, which has left a lot of brick and mortar companies scrambling to adapt. Look no further than companies like Amazon to see just how much potential there is in the e-commerce space.
One of the up and coming e-commerce players that have been making waves in the stock market is Shopify (NYSE:SHOP). The software company’s stock is trading around its all-time highs and seems to be poised for a strong year ahead due to an increased demand for e-commerce services as a result of the global health pandemic. With that said, it’s difficult for many investors to justify opening a new position in a stock after it’s recent run upwards. Shopify’s business model is certainly compelling, but is it time to add shares to your account? Let’s take an in-depth look at Shopify below and try to figure out whether or not now is a good time to buy.
Smart Business Model
When you take a look at Shopify’s business model, you begin to understand just why the stock price has been soaring. Shopify offers a subscription-based e-commerce platform that allows merchants to set up and operate an online store with ease. With their platform, merchants have straightforward access to things like payment processing, shipping, and marketing resources with the simple click of a mouse. Essentially, it’s a one-stop-shop for people that are interested in starting e-commerce businesses.
We know that there was a huge demand for e-commerce services prior to 2020, and with the global pandemic, demand has increased even more. That’s what makes Shopify’s business model so compelling. The company aims to be the go-to provider for people that want to open an e-commerce business and sell their products online. With a unique competitive advantage, Shopify has a real shot at capturing a lot of the market share from established online marketplaces like Amazon and Ebay.
Huge Performance This Month
We all know that March was a rough time for the stock market, and Shopify was not spared. The stock dropped from roughly $500 a share to about $300 a share at its March lows. A lot of this had to do with overall market conditions and the coronavirus crash, but there were also concerns about the global economy and just how much consumers would be spending going forward. During a recession, people tend to cut back on discretionary spending, which could mean less revenue for e-commerce players.
Some investors saw the March lows for Shopify as the perfect moment to pounce. That opportunity has paid off nicely, as Shopify’s stock price has rallied off of the lows and rocketed back to over $600 a share over the last 4 weeks. As the market rallied, sentiment shifted for the e-commerce company. Plenty of small merchants and retailers dealing with closed physical locations are looking to Shopify to help their businesses stay afloat. A quote from Shopify’s Chief Technology Officer Jean-Michel Lemieux tells you all that you need to know about their rally this month “As we help thousands of businesses to move online, our platform is now handling Black Friday level traffic every day!”. This has helped to contribute to huge sales for the company, but understand that a lot of this is currently priced in and that the stock is trading over 30X this year’s $2 billion projection for sales.
Momentum Stocks More Susceptible to Volatility
Now that we know a little bit about why Shopify has been rallying and what their business is all about, let’s look at one of the big downsides. The truth is that after this massive rally, opening a new position in Shopify comes with considerable risk. The company reports earnings on May 6th and will need to knock them out of the park in order to continue rallying. We’ve already seen what can happen to the company’s share price after they suspended their 2020 guidance in early April.
Additionally, investors need to understand that momentum stocks like Shopify are more susceptible to volatility. Sure, when the market was rallying hard off of the March lows, Shopify benefited greatly. Just keep in mind that real downside risk exists in the market going forward as we learn more about the real impact of the coronavirus on the economy. Sharp downturns in the stock market will likely hit Shopify hard as well, so make sure that you account for this added risk.
Huge Growth Potential with Short-Term Risk
If you are interested in picking up some Shopify shares, keep in mind that they have had quite the run-up over the last month. While sales are sure to increase as a result of the pandemic, those earnings are likely priced in after the massive rally this month. As long as you are ok with a high valuation and the potential for big downside risk in the short-term, Shopify can pay off big in the long-term. However, waiting until their next earnings report or a significant dip before opening a new position in Shopify makes a lot of sense at these levels.
7 Tech Stocks to Buy Now For a Post Coronavirus Economy
The Covid-19 pandemic has created a new “tech wreck”. But unlike the broad selloff at the end of 2018, this downturn has been more selective. Some stocks that looked like they were a little overbought have seen their share prices lowered.
In some cases, there was a legitimate reason for this. However, in other cases, it was likely a result of profit-taking disguised as something else. That’s the nature of a crisis. It gives investors the cover to do what they wanted to do anyway. But once investors start to sell, it can trigger a herd mentality.
And that’s when savvy investors start to look for opportunities. Because as Warren Buffett famously said, “Be greedy when others are fearful.” Tech stocks will lead the way back when the pandemic is over. Because if there’s one thing this moment in time is teaching us, it’s that we’re not going to be less dependent on technology. Businesses aren’t going to be doing less digital advertising. Consumers aren’t going to do less e-commerce.
But the fundamentals still matter. That’s why one of the common traits of many of these companies is that they have rock-solid balance sheets.
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