Shopify Stock: We Are At A Pivot Point (NYSE:SHOP)

Shopify (SHOP) has been beaten up over the last few months. The stock now rests 50% off the highs and appears to be working on forming a bottom. I think the medium-term direction will all depend on Q4 earnings, which are coming out on the 16th of the month. There are a lot of concerns around the potential deceleration of growth yet, there is optimism around Shopify’s growing cross-border reach. I remain bullish overall, but I will be watching very closely come February 16th.

What Are The Concerns?

Could this be the end of Shopify as we know it? No. It’s not. But that doesn’t mean there aren’t concerns in 2022 and beyond. Let me start with the current market situation. We are seeing tech stocks make massive moves on earnings reports. We can use Amazon (AMZN) as an example. We saw the company report earnings on the 3rd (after hours), and the stock popped as much as 16% from the day’s close on the 4th. That’s a massive move for Amazon in recent years. Shopify moved about 8% on that earnings report as well. The two get compared, and so the sympathy play was there. So why the concern around earnings? Expectations may be even higher now given what Amazon put out. It’s very possible that some of the positives could be priced in based on the move we saw on the 4th. When Shopify reports on the 16th, it could go either way. I think the results will be strong, but will they be strong enough?

One of the biggest challenges right now are the logistics nightmares. I’m sure you have heard of the backlog at the ports and the increased freight costs, but it is impacting every industry. In short, there isn’t anything that Shopify can do directly to help aid this problem, but they can help their small businesses facing issues as they are all having similar issues, so no one is left alone. A lot of their businesses are simply passing on costs to the consumers, and consumers are getting used to hearing of the backlog and the delays as everyone is in the same boat. This could impact numbers in Q4, and guidance in 2022, but if some of these logistical issues are solved, we could also see a big beat down the road.

Longer-term, we run into what I will call the “Tesla Problem”. What I mean by that, is that long-term growth targets are potentially already priced in. There is no question Shopify is a best-in-class eCommerce platform, the question comes around guidance and how they see the previously forecasted targets coming to fruition. This leads to the asset being overpriced and causes a drop like we have seen. Covid was both a blessing and a curse for Shopify. It forced many people to shop online and avoid the busy malls like so many are accustomed to doing so. The company will benefit from essentially two full years of Covid, it will be interesting to see how much market share they give back when the world fully opens up. We got a taste of it in 2021, but I do think that in 2022 or 2023 we will be fully open. Luckily, Shopify did capitalize on the Covid years and really grew. This will play out well in the long term, but will it set bars and expectations that are too hard to hit?

What Could Drive Shopify Higher?

Well, speaking of a high bar, we saw GMV grow 96% year-over-year in 2020. What does the number look like for 2021? Well, after three quarters, it had already surpassed the total for 2020, which had to be expected to an extent given the growth numbers Shopify has been putting out as seen below. Q4 is easily the most important quarter given the busy shopping season around the holidays. Looking back to 2020 Q4, we saw the company put up $41 billion in GMV, which was almost 100% growth year-over-year. This showed us just how powerful the Covid holiday season was. It will be interesting to see how much growth we see in Q4 of 2021.

I’m sure you have noticed the buy rating I have given Shopify. That is because I do think the long-term fundamentals outweigh the concerns. I trust the growth in the long term. The rate of growth will likely return to “normal” levels, which I’m willing to bet are going to remain well over 30% with respect to revenue based on all of the positives Shopify has going for it.

One of the big catalysts is the recent deal with JD.com (JD) which will allow merchants direct access to the Chinese marketplace. This will allow merchants to sell to JD’s 550 million active customers. Merchants will also be able to start selling their products in China within three to four weeks instead of waiting for 12 months, a wait-time typically required by foreign brands to sell in China. We will have to wait a few quarters to see how successful this is, but it’s one of the many things Shopify is doing to reach cross-border markets. The company is clearly aware that what is happening in North America alone is not enough to sustain the growth rates the market is used to.

As far as what we can expect come February 16th, keep an eye on the GMV growth. As I mentioned earlier, the growth number is the key one. We know that they did $6.3 billion on Black Friday/Cyber Monday, which was good for a 23% increase from 2020. The question will be the rest of the quarter and if we see stable growth or decelerating growth, which is the biggest concern. I do think Shopify is a buy at current levels given the future growth potential, but I am very hesitant to make a move either way before earnings.

What Does The Price Say?

As we sit technically, we find ourselves at a bit of a pivot point. As I mentioned, I think the earnings and more importantly the guidance will tell the story going forward in Shopify. That said, let’s look at where we could end up on either side of the coin.

I’ll start with the downside, it does appear we are forming a bit of a base at current levels, which is good, but we need to keep stops in place in order to manage risk. $775 is the first line of resistance. This is about 10% from current levels. If we break below that, we will likely carry on to $665, and beyond that $525. That would take us roughly 40% down from current levels, and 70% off the highs. I’m sure many are now “bag holding” due to failure of using stops. There were multiple levels of support broken on the way down. You must put stops in, especially when markets are volatile. Protecting capital is an absolute must. You can always buy it back later regardless of if you were wrong or right. The market doesn’t care, set stops and keep the money in your pockets.

As for the positive side, there is a lot of work to do. How quickly the rebound happens (if it happens) I don’t know. I do remain bullish on Shopify on a fundamental basis, but until price action correlates, I sit on the sidelines. So what needs to happen? For starters, we have to get back over $1000. We can see that $1020 is clear resistance, and has been multiple times over the last year and a half. Until we clear that, it doesn’t make any sense to buy in now. Yes, you could miss out on 15%, but it would be a clear signal that things are moving in the right direction again. Beyond that, we need to see the 200-day moving average, and $1285 taken down. Then we can entertain the idea of new all-time highs. From current levels to $1285 would be a return of ~50%.

The name of the game here comes down to one of two things. Either blind fundamental faith, or patience. I tend to prefer the patient side of things to help manage risk, but I know many prefer to try and get the cheapest entry price possible. If you do want to gamble here, please set stops. You can always buy it back.

Wrap-Up

As you can see, we are clearly at a pretty important pivot point as we await the February 16th earnings call. If I had to bet, I would be betting on a pretty positive earnings report given what we saw from Amazon and the growth history of Shopify. Will investors accept a lower growth rate, given the explosiveness we saw in 2020? Time will tell. I remain bullish on Shopify in the long run, but I will be on the sidelines waiting for a clearer picture of where the current trend is going in Shopify throughout 2022.