Tech investors have been given plenty of lessons in the past few months about making the best of a bad situation, none more so than Shopify (NYSE:SHOP). The e-commerce platform was one of the darlings of the pandemic-fuelled rally in 2020 and was hitting all-time highs as recently as last November. But like Icarus who flew too close to the sun, it has been a near-vertical drop since then.
Shopify’s stock is down a full 80% from that high and is back trading at its pre-pandemic levels. Such is the negative weight Wall Street is giving to the tightening monetary cycle we’re embarking on. But does this mean there’s no upside to be had in the near term? Maybe, but maybe not.
It will certainly be an uphill battle for investors who’ve held onto their pre-2022 positions or those who’ve tried to catch the falling knife so far this year. But for those of us on the sidelines, we can watch for the technical setups as they come and trade-off those.
Poor Fundamentals
First, though, let’s check out the fundamentals and get a sense of what’s going on behind the curtain at Shopify HQ. We have their Q1 earnings report from last week as a starting point. In the report, both revenue and EPS came in below the consensus, the latter being less than half of what was expected.
Total revenue in the first quarter grew 22% to $1.2 billion, which as the company pointed out represents a two-year compound annual growth rate of 60%. They also went out of their way to say that the first quarter of 2021 marked the highest revenue growth in the company's history as a public company, having been driven by the combination of government stimulus and COVID-19 lockdowns.
Even though the stock has been under relentless pressure and the macro environment for consumers is changing, management still feels that Shopify merchants are emerging from the last two years stronger and better prepared for commerce everywhere.
Harley Finkelstein, the company’s President, echoed this in the comments, saying that
“While we've experienced massive macro shifts since the start of the pandemic, the one mainstay has been that Shopify is the commerce platform of choice for merchants in any environment, with the ability to support commerce on any surface. This has earned Shopify significant merchant trust and the ability to help them with more parts of their business, which is why we are eager to bring Deliverr's team and technology to our merchants."
The news of the Deliverr acquisition, for a cool $2.1 billion, didn’t do enough to sway investors after the numbers that came out in the report. Having started to tick higher last week from April’s low, shares sank after the report and as of Monday’s close were down 30%.
Strong Potential
The team over at Wedbush went out of their way yesterday though to reiterate their Outperform rating. Analyst Ygal Arounian isn’t ignoring reality but feels the long-term potential remains strong. Having cut his price target from $937 to $630 ahead of last week’s earnings, Arounian brought it down further to $538 yesterday.
As an investor you obviously want the price target revisions to be going the other direction, but this is notable as the upside is still quite significant. With Shopify shares now at their lowest level since the depths of the pandemic sell-off in March 2020, we have a well-regarded analyst team saying there’s a 60% upside to be had.
For technical-minded investors, this bullish call comes at a time when shares are just starting to touch off a major support level. Around the $310-330 mark is where they consolidated for much of the second half of 2019, and it’s also where the bulls refused to let them go lower even when the walls were falling in at the onset of COVID. With the company still growing quarterly revenues at 20% year on year, is it the worst idea in the world to consider initiating a position?
Probably not, all things considered. The stock is down more than 80% from its high, and while it can always fall another 80%, you have to be thinking that the risk-reward profile is starting to favor the long side over the short at this point.
