Shopify (NASDAQ:SHOP) has to be one of the more frustrating growth stocks out there. Valuation is through the roof and there are plenty of doubters. But before the coronavirus-induced selloff, Shopify stock was on fire, as the company continues to deliver on growth.
I don’t think investors have missed their opportunity in Shopify stock. Even though shares are holding up nicely in their 52-week range, they are still down notably from the highs. Further, they may very well have more downside ahead.
Why’s that? I hate to be the one to break it to investors, but Shopify is not down solely because of coronavirus.
After reporting better-than-expected earnings on February 12th, shares opened at ~$569 and rallied to almost $594, before falling and closing at just $531.25.
Shares remained beneath $550 in the ensuing days, before broader market selling eventually pushed it lower.
Trading Shopify Stock
I try not to let emotions into the game, but with Shopify stock, it’s a difficult (and mixed) endeavor.
On the one hand, I was able to ride the stock higher, dumping it at $400 in August. On the other hand, I had a buy order set at the test of the 200-day moving average, mere dollars from where Shopify ultimately bottomed in November before doubling a few months later.
With the Volatility Index (VIX) above $50, the price moves are unpredictable. For all we know, the bottom could be in for Shopify stock. Or maybe it falls another 25%. Unfortunately, there’s no crystal ball for this kind of stuff.
Here’s my strategy. I like to set deep downside targets with good-til-cancelled (GTC) limit orders. I do this for a handful of stocks that I like, nibbling them on a discount. Rarely do all the targets get hit (and it’s kind of scary when they do). But the markets always find a way to bounce back eventually and so do the best companies.
The key to this strategy working? You need to either keep a decent amount of cash on hand or have taken profits on the way up. That way you are adding back at better prices and/or deploying fresh capital in long-term themes, which is exactly what Shopify is.
Down about 30% from the highs, it may be worth nibbling a bit of stock down here. I did. But I did it knowing full well that we could see sub-$400 in the ensuing days, and even lower. Keep in mind, Shopify stock bottomed at $280 in November, still a ways below current levels.
Pick a price (or prices) you feel comfortable owning the stock at, set your orders and let the market do the work. This type of strategy isn’t for everyone. However, it prompts an interesting paradigm shift, as you find yourself rooting for a bit more downside to get your fills, embracing the selloff rather than fearing it.
Bottom Line on Shopify
That brings us to the point of, “why should I be excited about buying Shopify stock on a deep decline?”
The answer is simple and that’s the power of e-commerce. For years now, Amazon (NASDAQ:AMZN) has been the only game in town when it comes to e-commerce. Sure you could use eBay (NASDAQ:EBAY) or Etsy (NASDAQ:ETSY) if you were a small seller. But large sellers knew where the action was at.
But Amazon plays the game for itself. It keeps the customer data and trends, and it controls the customer experience, not the brand. It doesn’t matter if you’re Mildred the Button Maker or Johnson & Johnson (NYSE:JNJ), Amazon holds the power.
With Shopify, it’s different. The company acts as the backbone to powering an e-commerce front, and as companies continue to make digital and technological overhauls, they’re taking notice. Here’s the wave that Shopify is riding, the secular trend of e-commerce:
Yes, Shopify stock is very expensive, and it’s barely profitable, making a price-to-earnings ratio irrelevant. On a price-to-sales basis, it trades at 22 times this year’s estimates and 16 times estimates for 2021. But guess what? When Amazon was setting the stage for its dominance, it was expensive too. By traditional measures, it still is. But game-changing, non-traditional and exceptional companies don’t come at a discount.
For Shopify, I like to use its market cap. Potential M&A interest may keep this a bit elevated, but I like to think about how big Shopify could be in five or ten years.
Could I see that figure being $90 billion? Yes, I could. At today’s $45 billion valuation, that’s a double. If it takes five years, fine. If it’s ten, that’s still a 7.6% compound annual growth rate. Is this an overly simplistic way of looking at the situation? To an extent, yes. But sometimes that’s how you have to think with some of these companies.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long SHOP.