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Bull of the Day: Shopify (SHOP)

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Shopify (SHOP - Free Report) is the $68 billion disruptor in online marketplaces taking on Amazon (AMZN - Free Report) and Ebay (EBAY - Free Report) in the small business "etailer platform" market.
 
Just seven weeks ago, I was writing about SHOP as the Bear of the Day when shares were trading $500 on March 3. Here's what I wrote then...
 
And earnings estimates just plunged after the company revealed a big investment year ahead in their Q4 report delivered on February 12.
 
Since that reveal, the Zacks consensus for full-year 2020 EPS dropped over 75% from $0.89 to $0.21. Next year got clobbered 55% from $1.60 to just $0.72.
 
Analysts also found themselves having to adjust their ratings as well since the hyper-growth platform trades at 25 times sales. 
 
Shopify was downgraded to Neutral from Outperform at Credit Suisse with analyst Brad Zelnick saying that despite another strong quarter from Shopify -- and his positive fundamental view on the company's long-term opportunity and belief in management's strategy and ability to execute -- he cut the shares on its "lofty valuation and embedded expectations."
 
Yet, price targets were raised dramatically across the board in February after the company call, and that's why shares soared from $500 to nearly $600 on Feb 12...
 
SunTrust: Hold $340 to $585
Baird: Outperform $465 to $590
Wedbush: Neutral $325 to $475
Wells Fargo: Overweight $400 to $600
KeyCorp: Overweight $485 to $575
Rosenblatt: Buy $481 to $630
UBS Group: Underperform $450
Credit Suisse: Neutral $450 to $575
Raymond James: Outperform $365 to $600
Canaccord Genuity: Buy $385 to $600
Royal Bank of Canada: Outperform $400 to $650
 
Investors wanting to get into Shopify (myself included) probably thought we were going to get our chance in the recent correction.
 
I wanted to get in on the Jan 9 gap fill near $420 but I was too slow on Friday.
 
Now I'll have to wait until SHOP is out of the Zacks Rank cellar.
 
(end of my March 3 notes on SHOP as the Bear of the Day)
 
SHOP shares fell over 35% after that but kept finding buyers under $340 during the market collapse the week of March 16th. A few weeks later on April 7, Raymond James analyst Brian Peterson downgraded SHOP to Market Perform. 
 
Ten days later, the stock had soared over 50% from $390 to $590. So Peterson published a research note on 4/17 titled "Feedback on Our Downgrade Note (and Why It's Been Dead Wrong So Far)." In that note to clients, he explained what he and his team missed, courtesy of TheFly.com...
 
His rationale for downgrading the shares was the company's exposure to cyclical shifts in consumer spending, higher exposure to apparel, his view that estimate cuts had not been steep enough yet and the stock's premium valuation, but "what we seemingly missed in this dynamic is how quickly COVID-19 may push new merchants to the Shopify Platform," Peterson said. Despite traffic data that supports benefits for Shopify and "suggests that our call was wrong," Peterson concluded that he is "not sure that this is the right time for shares to be at all time highs." He maintains a Market Perform rating on Shopify shares.
 
Peterson also noted the nature of client feedback discussions...
 
"Our investor conversations post the downgrade mostly centered on relative exposure to categories like apparel, and how we should be thinking about GMV trends (note that our model is 19% below consensus for 2Q20)."
 
This week, as you probably know, SHOP has been making new all-time high closes above $600. 
 
Wedbush put out a note this week titled "Traffic Surging During Coronavirus But Revenue Upside Also Priced In" and moved their PT down to $445.
 
So what's driving the enthusiasm for SHOP shares despite this analyst pessimism? Just a tweet, via a little blue bird. Here's how Wedbush characterized the message...
 
On Friday, Shopify CTO Jean-Michel Lemieux shared on Twitter that Shopify's platform is handling Black Friday level traffic on a daily basis during coronavirus. He also noted optimism about traffic growth, and that "it won't be long before traffic has doubled or more." This is a clear positive signal for Shopify. We've noted our view that ecommerce platforms and web builders will be net-beneficiaries in the long-term as consumer and business trends will pull forward both during and after the pandemic and this data certainly supports that Shopify is exceptionally well positioned to capitalize on that trend.
 
The Wedbush analysts went on to note that the traffic spike is not a direct correlation to revenue as it does not necessarily equate to spending and GMV. Plus, Shopify is giving extended free trials to non-Plus merchants and the company noted in its business update that merchants are heavily relying on discounting.
 
There is also the factor that Shopify's merchants largely represent consumer discretionary spend on items from categories like fashion, cosmetics, health and beauty.
 
Bottom line: Shopify remains a competitive force in e-commerce that offers a fantastic platform for small business unequaled by Amazon or Ebay. And their business will gain traction longer-term because of the current brick-and-mortar apocalypse in retail. But the valuation has run far ahead with the stock trading over 30X this year's projected sales of $2 billion. Look to be a buyer on the next dip under $500.
 
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