Shopify: 3 deals for investors expecting online retail to pick up

  • Shopify shares are down more than 72% since the start of the year
  • Gloomy prospects for the internet heavyweight
  • Long-term investors might consider buying SHOP shares at the current level
  • Looking for more blue chip stock ideas to add to your portfolio? InvestingPro+ members enjoy exclusive access to our research tools, data and shortlisted screeners. Learn more “

Shareholders of Canadian e-commerce giant Shopify (NYSE:) have seen the value of their investment decline by more than 65% in the past 52 weeks and 72% since the start of the year (YTD). By comparison, the index has lost 38% so far this year.

COVID-19 has boosted e-commerce globally and Shopify has been one of the beneficiaries. However. in the last quarter of 2021, the online retail platform provider warned investors that it was “beginning to see the intense levels of online sales companies that had built up during the COVID-19 pandemic wane”.

And that warning coincided with SHOP’s recent stock movements. On November 19, 2021, Shopify shares hit an all-time high of $1,762. But, on May 6, they hit a multi-year low of $355.13, down about 75% over the past six months.

How Recent Metrics Arrived

Shopify posted Q1 figures May 5. Overall, the results were worse than analysts’ estimates. Total revenue was $1.2 billion, up 22% year-on-year. Merchant Solutions drove revenue growth with $858.9 billion, up 29% year-over-year. Subscription solutions revenue grew only 8%.

Meanwhile, gross merchandise volume increased 16% year-on-year to $43.2 billion. Adjusted net income dipped to $25.1 million, or 20 cents per diluted share, from $254.1 million, or $2.01 per diluted share, in the prior year period.

On the results, Chairman Harley Finkelstein commented:

“While we’ve seen massive macro shifts since the pandemic began, the one pillar has been that Shopify is the commerce platform of choice for merchants in any environment, with the ability to support commerce on any surface.”

Management expects year-over-year revenue growth to be lower in the first half and higher in the fourth quarter of 2022. growth will follow revenue growth.

Prior to the quarterly earnings release, Shopify stock was trading at around $485. It is now changing hands for $377.49, down about 22%. In other words, investors were not happy with the results which showed lower sales but higher costs. Meanwhile, the company’s market capitalization (cap) currently stands at $47.5 billion.

What to expect from Shopify inventory

Among 42 analysts surveyed via invest.comSHOP stock has an “outperform” rating, with a 12-month average price target of $883.96 for the stock.

Source: Investing.com

Such a move would suggest a 134% increase from the current price. The target range is between $460 and $1,990.

However, based on a number of valuation models, including P/E or P/S multiples or terminal values, the average fair value of SHOP shares on InvestingPro is $459.19.

Shopify fair value

Shopify fair value

Source: InvestingPro

In other words, the fundamental valuation suggests that stocks could rise by around 21.5%.

We can also examine SHOP’s financial health, determined by ranking more than 100 factors against its peers in the information technology sector. In terms of cash flow and growth, it scores 4 out of 5. Its overall rating of 3 points is a good performance ranking.

Currently, SHOP’s P/E, P/B and P/S ratios stand at 261.9x, 4.9x and 9.9x. Comparable metrics for peers are 10.5x, 7.4x, and 8.6x.

As part of short-term sentiment analysis, it would also be important to look at implied volatility levels for Shopify options. Implied volatility generally shows traders the market’s view of a security’s potential moves, but it does not predict the direction of the move.

SHOP’s current implied volatility is around 7% lower than the 20-day moving average. In other words, implied volatility for Shopify stocks is trending lower, while options markets potentially suggest less instability ahead.

We expect SHOP shares to trade in a wide range and build a base between $340 and $380 in the coming weeks. Then Shopify stocks could potentially start a new stage.

Adding SHOP stocks to portfolios

Shopify bulls who don’t care about short-term volatility might consider investing now. Their target price would be $459.19 as indicated by the fundamental patterns.

Alternatively, investors could consider buying an exchange-traded fund (ETF) that holds SHOP shares as a holding. They include:

  • ARK Fintech Innovation ETF (NYSE:)
  • Dow Jones First Trust International ETF (NASDAQ:)
  • Roundhill MEME ETF (NYSE:)
  • Franklin Disruptive Trade ETF (NYSE:)
  • ETF SoFi Gig Economy (NASDAQ:)

Finally, investors expecting SHOP stock to rebound in the coming weeks might consider setting up a bullish buy spread.

Most options strategies are not suitable for all retail investors. Therefore, the following SHOP stock discussion is offered for educational purposes and not as an actual strategy for the average retail investor to follow.

Bull Call Spread on Shopify Stock

Intraday price at time of writing: $377.49

In a bullish call spread, a trader has a long call with a lower strike price and a short call with a higher strike price. Both legs of the trade have the same underlying stock (i.e. Shopify) and the same expiration date.

The trader wants the SHOP stock price to rise. In a bullish buy spread, the levels of potential profit and potential loss are limited. The transaction is established for a net cost (or net debit), which represents the maximum loss.

Today’s bullish call spread trade is to buy the 380 Strike Call expiring June 17th for $41.60 and sell the 390 Strike Call for $36.85.

Buying this buy spread costs the investor about $4.75, or $475 per contract, which is also the maximum risk for this trade.

It should be noted that the trader could easily lose this amount if the position is held until expiry and both legs expire worthless, i.e. if the SHOP stock price at the expiry is lower than the strike price of the long call (or $380 in our example).

To calculate the maximum potential gain, one can subtract the premium paid from the difference between the two strikes, and multiply the result by 100. In other words: ($10 – $4.75) x 100 = $525.

The trader will make this maximum profit if the Shopify stock price is at or above the short call strike price (higher strike price) at expiration (or $390 in our example).

Conclusion

In recent months, Shopify’s stock has come under significant pressure. Still, the decline has improved the margin of safety for investors who may consider investing soon. Alternatively, experienced traders could also set up options trading to benefit from a possible rise in the price of SHOP shares.

Interested in finding your next big idea? InvestingPro+ gives you the ability to screen over 135,000 stocks to find the fastest growing or most undervalued stocks in the world, with professional data, tools and insights. Learn more “

Anne G. Cash