SHOP Stock Flashes Far Too Many Warning Signs for Comfort

I gave up waiting for Shopify (NYSE:SHOP) stock to crash months ago. I called it a bubble and told investors to avoid it all the way back in 2019. No one listened. They were right not to do so.

The rise in Shopify stock since then has been staggering. It was at $275 per share when I first started dumping on it. It was trading at almost $1,500 per share at the time of my most recent article.

Then, when my back was turned, the crash finally happened. A negative earnings report for the third quarter, announced in late October has sent the stock down 50%. It’s trading around $820 as of Feb. 3.

Can SHOP stock, “my favorite mistake,” prove me wrong again?

Is SHOP Stock Still Overvalued?

The early indications are negative. Shopify was an incredible growth story when growth was all the rage. Revenues nearly doubled between 2019 and 2020. They’re still rising.

Through the first three quarters, Shopify had generated 10% more revenue than in all of 2020. The fourth quarter, due to be reported Feb. 16, should see another rise to $1.37 billion. That’s 22% more revenue than in the third quarter, 40% higher than last Christmas.

Shopify also reports profits … sometimes huge profits. Just not from operations, which lost $4 million in the third quarter. Instead of looking at “other income,” however, analysts focused on revenue, which missed estimates slightly.

Since then, SHOP stock has been hit by a re-evaluation of many growth drivers. For example, investors are assessing its Buy Now, Pay Later (BNPL) tie-up with Affirm (NASDAQ:AFRM), which drove both companies’ results. They’re also examining its alliances in China, which were previously seen as great news. Finally, investors are critical of its interest in cryptocurrency, highlighted by CEO Tobias Lutke joining the board of Coinbase (NASDAQ:COIN).

But they’re mainly critical of Shopify’s valuation now. Even if Shopify hits its revenue mark for the fourth quarter, it will show 2021 revenue of $4.6 billion. The company’s market cap entering trade Feb. 3 was $111 billion. In today’s trading environment, that’s too high.

Can Shopify Make a Comeback?

Analysts haven’t given up on SHOP stock. For example, none of the 18 following it at Tipranks is telling anyone to sell, and 11 still have it on their buy lists. The average one-year price target is over $1,400 share (nearly 72% upside).

But SHOP bears are looking at Shopify’s growth rate. They worry if it can continue. I’m more worried that Shopify is handing cash advances to new customers, some of whom don’t pay them back.

Even while Shopify stock is falling there are analysts pounding the table for it. They say Shopify has the second-largest share of the e-commerce market, behind only Amazon (NASDAQ:AMZN).

They say many stores, especially the small merchants Shopify specializes in, are still adding online operations. SHOP stock bulls see the present supply chain disruptions as temporary. They note that gross merchandise value (GMV) of Shopify transactions was $42 billion for the third quarter. They predict revenue will grow to $16 billion per year by mid-decade.

But even if it does, does that justify Shopify’s $111 billion market cap today?

Bottom Line on Shopify Stock

I have been wrong for so long on SHOP stock I hesitate to put out a sell signal on it.

But I can’t help myself.

Right now, you’re paying 24 times revenue for Shopify. The company is at the heart of all the trends investors are worried about, China, Bitcoin (CCC:BTC-USD), supply chains, Buy Now, Pay Later and more.

If you had listened to me, you would have missed the run-up. Since I first started following Shopify stock it has literally been a 10-bagger for investors. But the smart money has jumped off this train, and I’d hate to see you still sitting on it when the crash comes.

Take some profits.

On the date of publication, Dana Blankenhorn held long positions in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.

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