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Bear of the Day: Shopify (SHOP)

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On paper, Shopify (SHOP - Free Report) looks like an ingenious business idea – to create and maintain tools that allow smaller businesses to compete with the giants, particularly Amazon (AMZN - Free Report) , in online sales.

The burden of developing and maintaining a dedicated platform for online sales is an onerous task for small businesses, prohibiting them from taking on the proverbial “800 pound gorilla” in the space.

Shopify counts more than 800,000 merchants as customers who collectively sold over $40 billion worth of products and services last year. Shopify’s customers can also access applications for electronic advertising, shipping and data collection.

These cloud-based services are a lifeline for small businesses who simply don’t have the scale to handle all the aspects of the online marketplace on their own, and the tools that Shopify provides prevent a great deal of effort that would have been redundant - instead offering economies of scale to even the smallest merchants.

So what’s the problem? How can Shopify possibly be “Bear of the Day?”

Because they just don’t make very much money.

With net earnings of less than $0.05/share in three of the past four quarters, estimates of $0.41/share for 2019 and a stock price that’s seen rapid appreciation over the past two years, Shopify is trading at a sky-high level of valuation. It’s current 12M forward P/E ratio is just shy of 500X!

While it’s certainly possible for a young and growing company to thrive without producing net earnings – Amazon itself famously avoided worrying about the net number for more than a decade, furiously reinvesting revenues into expansion on it’s rise to becoming one of the biggest companies in the history of the world – it’s not clear that Shopify is on the same sort of trajectory.

Notable short sellers have targeted the company’s shares, citing the recent runup and questioning how many of Shopify’s customers are unique, active and profitable. The company doesn’t break out that data (though 800,000 does sound like an awfully high number.)

Shopify shares have gained more than 75% since the Christmas Eve selling flush in 2018 even as earnings estimates have moved in the opposite direction. With 14 downward earnings estimate revisions in the past 60 days taking the Zacks Consensus Estimate from $0.67/share down to $0.41/share, Shopify gets a Zacks Rank #5 (Strong Sell).

Shopify is one of those Bear of the Day stocks that seem almost like a good investment. There’s nothing wrong with the way they run the business and their core ideas have proven market value. The share price has simply come too far, too fast to be reasonably justified based on current forecasts.

Investors in the Internet Services industry would be better served considering Autohome Inc (ATHM - Free Report) a Zacks Rank #1 (Strong Buy) or Dropbox (DBX - Free Report) a Zacks Rank #2 (Buy).

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