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Bear of the Day: Shopify (SHOP)

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Shopify Inc. (SHOP - Free Report) has been growing at a breathtaking pace and just beat earnings again. Then why is it a Zacks Rank #5 (Strong Sell)?

Shopify is a Canadian-based commerce platform designed for small and medium-sized businesses. Merchants use the software to sell their products online, including on the web, mobile, social media, marketplaces and brick-and-mortar locations.

It currently serves about 600,000 businesses in 175 countries including such brands as Nestle, Red Bull, Rebecca Minkoff and Kylie Cosmetics.

Shopify Beat in Q4

On Feb 15, Shopify reported its fourth quarter results and beat the Zacks Consensus by 10 cents. Earnings were $0.15 versus the Zacks Consensus of $0.05.

Revenue in the fourth quarter soared 71% to $222.8 million. For the year, revenue was $673.3 million.

Gross Merchant Volume (GMV), which is a key metric for the company, jumped 65%, or $3.6 billion, to $9.1 billion.

During the holiday season, Black Friday to Cyber Monday resulted in $1 billion of GMV with a peak of $1 million of orders processed per minute.

Most shoppers are still buying from their phones as mobile devices accounted for 73% of traffic and 61% of orders for the quarter. That was up from 55% in the year ago period.

Guides Revenue Above Consensus

Shopify provided full year revenue guidance of between $970 million to $990 million above the then consensus.

The consensus has since risen to $994 million which is revenue growth of 48%.

The growth is expected to continue in 2019 with revenue expected to rise another 37%.

Why Is it a Zacks Rank #5 (Strong Sell)?

If everything is looking solid, why is it a Strong Sell?

Remember, the Zacks Rank is based on the analyst estimates and those are being cut for 2018.

13 have cut for the full year in the last 30 days with 5 being lowered in the last week. The Zacks Consensus Estimate has dropped to $0.13 from $0.30 in the last month.

That's a decline in earnings of 18% as the company made $0.16 in 2017.

Estimates were also cut for 2019, with 3 lower and 1 higher in the last week. The 2019 Zacks Consensus Estimate fell to $0.50 from $0.72 over the last 30 days.

The Stock is on Fire

While shares retreated a bit after the earnings report, they're still up 27% year-to-date, well out performing the NASDAQ or the S&P 500 during that period.

This is the type of company where investors are buying solely for the revenue growth and earnings are secondary.

It has a forward P/E of 1031.

It's growing so fast it increased its headcount by 50% to 3,000 in 2017.

But it's got plenty of cash on hand in case there are growing pains. As of the end of December 2017 it had $938 million, up from $392.4 million at the end of last year.

Internet-Focused Companies With Better Zacks Ranks

If you decide to avoid the shares because of the Rank, which changes daily so you might want to check back in frequently, you might want to consider some of its big tech peers such as Facebook (FB - Free Report) which is a Zacks Rank #1 (Strong Buy) or Baidu (BIDU - Free Report) which is a Zacks Rank #3 (Hold).

In full disclosure, I own shares of Facebook in my personal portfolio.

In the software arena, small cap Mindbody (MB - Free Report) is a Zacks Rank #3 (Hold). It makes software for the fitness and wellness industry which allows customers to sign up for classes online.

It's also seeing strong growth. Revenue is expected to rise 24% in 2018. It has a forward P/E of 166.

More Stock News: This Is Bigger than the iPhone!                   

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.  

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