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Is Shopify Stock A Buy As New Chart Pattern Forms?

Business

Shopify (SHOP), the upstart challenging eBay (EBAY) and Amazon.com (AMZN), has benefited as the coronavirus pandemic fuels an online shopping boom. But is Shopify stock a buy right now?

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Shopify was started by snowboarding enthusiasts a decade ago. In fact, it started as an online snowboard shop, moving into e-commerce software when the founders couldn’t find what they were looking for — a platform to both sell goods and grow their brand.

What Is Shopify And How Does It Work?

The e-commerce platform provider helps businesses to set up shop online. BigCommerce (BIGC), a new IPO, is a close competitor. But tech stalwarts Amazon (AMZN), Microsoft (MSFT), Adobe (ADBE) and Facebook (FB) have also made a push to provide e-commerce solutions for businesses.

Across 175 countries, 1.75 million merchants use the SHOP platform to sell and market their products. In return, the software company earns subscription fees. Subscriptions range from $29 per month for entrepreneurs to $2,000 and up for large companies. It also offers shipping, digital payments and fulfillment, under the umbrella terms of merchant solutions.

In 2020, revenue from merchant solutions grew 116%, while revenue from subscriptions grew 41%. Gross merchandise volume, or the value of all goods sold on the Shopify platform, soared 96% to $119.6 billion.

Shopify estimates it now has a 9% share of the U.S. e-commerce retail market — more than eBay (EBAY), Apple (AAPL) and Walmart (WMT), but below Amazon at 39%.

Shopify Stock Technical Analysis

Shares are forming a cup base with a 1,499.85 buy point. Shopify stock is now retaking the 50-day line, according to MarketSmith chart analysis. The current consolidation goes back to early February and follows two failed breakouts.

SHOP stock sold off after warnings that torrid growth won’t repeat this year. On Thursday, the software stock was added to IBD SwingTrader as it overcame resistance at the 50-day line.

The relative strength line for SHOP stock rallied for most of 2019 and 2020. It moved lower this year but is starting to improve. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.

Shopify stock earns a Composite Rating of 77 out of 99. The rating combines key fundamental and technical metrics in a single score.

The e-commerce software company has a 73 RS Rating. That means it outperformed 73% of all stocks over the past year.

The Accumulation/Distribution Rating of D- reflects moderate selling by institutions over the past 13 weeks. As of last December, 1,781 funds owned Shopify stock. In fact, SHOP shows eight quarters of rising fund ownership, according to the IBD Stock Checkup tool.


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SHOP Earnings And Fundamentals

Fundamentally, Shopify looks far stronger than on technicals. On key earnings and sales metrics, Shopify stock earns an unbeatable EPS Rating of 99, and an SMR Rating of A, on a scale of A-E, with A the best. The EPS rating compares a company’s earnings growth to other companies, and its SMR Rating measures sales growth, profit margins and return on equity.

On Feb. 17, the e-commerce software leader beat earnings estimates for the fourth quarter. Shopify earnings soared 257% to $1.58 a share as revenue jumped 94% to $977.7 million.

Both merchants and consumers pivoted online during the pandemic, benefiting Shopify. But SHOP stock sold off as the company withheld revenue guidance for 2021 and warned of slower growth, after a blowout year.

Instead, Shopify’s financial outlook “assumes that as countries roll out vaccines in 2021 and populations are able to move about more freely, the overall economic environment will likely improve.” It expects some rotation in consumer spending back to offline retail and “a more normalized pace” of e-commerce growth.

(Shopify)

Wall Street expects Shopify EPS to fall 2% in 2021 as revenue grows 36%, according to Zacks Investment Research. Starting in the current March quarter, Shopify stock will have more difficult year-over-year comparisons, analysts say.

Over the past three years, Shopify grew earnings 136% on average and sales 59%. Investors should generally look for stocks with sustained earnings and sales growth of at least 25%. So SHOP stock is far ahead on both counts.

The hot software stock has a 16% annual profit margin, the IBD Stock Checkup tool shows. Its 10% return on equity is under the minimum 17% that investors would want to see.


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Coronavirus Impact On Shopify Stock

In 2020, Shopify emerged as a clear coronavirus stock winner. The pandemic drove up online buying and selling, with more consumers and merchants turning to the Shopify platform.

Shopify is investing heavily to grow. In 2021, key areas of investment include the Shopify Fulfillment Network, the Shopify app and international expansion. It’s also integrating 6 River Systems, a 2019 acquisition that makes warehouse software and robots, into its distribution network.

Analysts call the company a structural winner from the pandemic boost to e-commerce. Thirteen analysts have a buy rating on SHOP stock, 12 have a hold and one has a sell, per Zacks.

Goldman Sachs forecasts that global e-commerce will grow 19% annually over the next three years, up from a prior view of 16%.


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Spending On Shopify Tops eBay — Amazon Next?

Shopify has now surpassed eBay in gross merchandise volume. But it’s not itself a retailer. Rather, it provides merchants with the software tools to build websites for selling products and managing their business, under their own domain name and brand.

On Feb. 9, the company expanded Shop Pay, its faster checkout tool, to Shopify merchants on Facebook and Instagram.

Shopify had several notable achievements in Q4 2020:

  • Shopify merchants had sales of $5.1 billion from Black Friday through Cyber Monday. That compared with $2.9 billion over the same holiday period a year ago.
  • It further built out Shopify Fulfillment Network, a service that uses software tools and deep learning to get orders to customers quickly and cost effectively. Shopify could break even on this $1 billion investment by 2023, analysts say.
  • It also grew programs to lend to businesses (Shopify Capital), and to help merchants mail online orders with less friction (Shopify Shipping).

In 2020, Shopify also forged a marketing partnership with viral video-sharing app TikTok. Earlier partnerships included Walmart, Facebook (FB), Pinterest (PINS) and well-funded startup Stripe.

Also last year, Shopify rolled out Shop Pay Installments, a “buy now, pay later” product. And it partnered with Alibaba (BABA) to allow U.S. merchants to get paid by more than one billion Alipay users in China.

Analysts at KeyBanc Capital Markets believe that Shopify could eventually levy an e-commerce fee from merchants, similar to Amazon.

However, more and more companies seek to provide e-commerce software services. Adobe acquired e-commerce technology firm Magento in 2018. Microsoft launched Dynamics 365 in 2019. Longtime partner Facebook introduced Facebook Shops and Instagram Shops in 2020.

In February, Amazon acquired Selz, a Shopify rival that helps small businesses to build online stores.


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SHOP Stock Group

Shopify belongs to IBD’s Computer Software-Enterprise group, which ranks a poor No. 180 out of 197 industry groups. The enterprise software group has been a big winner, but a recent market rotation saw investors shift money into cyclical sectors such as mining, metals and financials.

Also, enterprise software stocks emerged as winners because of the work-from-home trend during the coronavirus pandemic. But more recently, work-from-home cloud stocks have suffered as the vaccine rollout picked up pace.

Stocks to watch in this group include Salesforce (CRM), Twilio (TWLO) and Paycom Software (PAYC). Other members include ServiceNow (NOW), DocuSign (DOCU), Workday (WDAY) and Zoom Video (ZM).

Digital Turbine (APPS) and Dynatrace (DT), which are current or former IBD 50 stocks, are other stocks to watch in this group.

ServiceNow stock is on IBD Leaderboard, a curated list of stocks with the most potential for big gains.


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Is Shopify Stock A Buy Right Now?

Shopify ticks off many of the boxes that investors should be looking for. It was a big winner in 2019 and 2020, solidifying its threat to eBay and Amazon. Key acquisitions and expansions promise more runway for growth.

The software company boasts huge earnings and sales growth, which got a boost from the pandemic. However, Wall Street expects SHOP’s growth to slow after a blockbuster 2020.

From a technical viewpoint, SHOP stock has a new 1,499.85 buy point. Shopify stock has retaken the key 50-day level and has an improving RS line.

Bottom line: Shopify stock is not a buy right now.

Other large-cap stocks to buy right now may also offer proper breakouts as well as the potential for solid rewards.

To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD research.

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