Although e-commerce solutions provider Shopify (NYSE:SHOP) reported blowout third-quarter numbers in late October, which blew past expectations, Shopify stock still dropped after the print because the magnitude of the Q3 earnings beat was smaller than what the company reported in Q2.
Specifically, Shopify topped Q2 earnings estimates by over a buck. The company only beat Q3 earnings estimates by 63 cents.
Talk about petty.
Long-term investors shouldn’t pay any attention to this pettiness. Instead, for three big reasons, long-term investors should consider buying this post-earnings dip in SHOP stock. Those reasons include:
- Shopify’s blowout third quarter numbers underscore that the “new normal” the world is adjusting to is one wherein small retailers place significantly more value on e-commerce, and therefore, lean more heavily on Shopify to power their businesses.
- Amid rising Covid-19 cases and a fresh round of government lockdowns, Shopify is optimally positioned for a blowout holiday quarter.
- Below $1,000, Shopify stock is undervalued relative to the company’s long-term profit growth potential.
To that end, I say ignore the noise, and buy the dip in SHOP stock.
Here’s a deeper look.
Blowout Shopify Earnings
Shopify’s blowout third quarter earnings report underscored one very important reality: While the world is normalizing, we aren’t going back to the old normal — rather, we are going back to a “new normal”, and in this new normal, Shopify is more important than ever before.
Specifically, in the quarter, Shopify reported 109% gross merchandise value (GMV) growth and 96% revenue growth. Both of those numbers are consistent with what Shopify reported last quarter, and also well ahead of Shopify’s growth trends pre-Covid, when GMV growth was hovering around 50% and revenue growth was around 45%.
Shopify’s sustained huge growth in the third quarter — a time in which the world did increasingly normalize — strongly implies that the world isn’t going back to the old normal, but rather rushing into a new normal.
In this new normal, consumers shop online more than ever before, and small retailers — who previously relied heavily on physical sales to drive their businesses — are now looking to e-commerce as their future.
Of course, that’s great news for Shopify, because the company provides e-commerce solutions which help all those small retailers sell online. Thus, as the world increasingly pivots into this new normal wherein e-commerce reigns supreme, demand for Shopify will remain exceptionally robust.
In this sense, Covid-19 permanently accelerated the Shopify growth narrative — and will provide a big boost for SHOP stock not just in 2020, but for the next few years, too.
Shopify Stock Is Positioned for a Huge Holiday Quarter
By virtue of the year being 2020 and there being a global pandemic raging around the globe, Shopify was already positioned to have a strong holiday quarter as consumers shopped online more than ever before in November and December.
But recent developments underscore that Shopify’s holiday quarter will likely be even better than the rosiest of forecasts.
Covid-19 cases across the globe are spiking like crazy, with hospitalizations and deaths on the rise, too. There have been some hiccups in the vaccine approval process, the sum of which imply that we will not get a widely available Covid-19 vaccine in 2020. Multiple countries across Europe — including EU giants like Germany and France — are going back into partial lockdowns reminiscent of April lockdowns. And, of course, winter and flu season are coming across all of Europe, Asia and North America, two big things which should keep consumers inside more than in the summer or fall.
Add it all up, and this winter could look a lot like the spring in terms of (lack of) consumer mobility.
What did Shopify do in the spring quarter? Report enormous, 119% GMV growth and 97% revenue growth. That was in the middle of the heart of the global economic recession. This winter, the economy will be on much more sure footing.
The implication, of course, is that Shopify could do much better than 120% GMV and 100% revenue growth in Q4. If so, such amazing numbers will provide a winning boost to SHOP stock to end the year.
Shopify Stock Is Undervalued
Zooming out, my numbers indicate that Shopify stock is undervalued below $1,000.
My previous model — which assumed that Shopify turned into the technology infrastructure backbone of an increasingly large SMB e-retail sector — called for Shopify to do about $55 in earnings per share by 2030. Based on that earnings power, I said SHOP stock was worth about $925 today.
Given Shopify’s sustained robust growth in the third quarter, I’ve updated that model to call for accelerated growth to persist into 2021 and 2022. Now, I see Shopify’s earnings marching towards $70 by 2030. Based on that earnings power, I now see SHOP stock being worth about 1,200 today.
So, with Shopify stock trading below $1,000 on the heels of record earnings and ahead of what could be a blowout holiday quarter, SHOP stock looks like a good buy.
Bottom Line on SHOP Stock
Shopify is a long-term winner, that is firing on all cylinders today, and which has a huge upward catalyst on the horizon. That’s a recipe for success. Any and all weakness in SHOP stock today is just a buying opportunity.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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