Are Shopify shares at the bottom of a trough?

Our overseas investing expert wonders whether this is an opportunity to buy a rival to Amazon.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

It’s not just vaccine makers that stand to gain from the coronavirus crisis. interactive Investor customers have been taking notice recently of an unlikely beneficiary whose shares have surprisingly slipped back just when better times look to be on their way.

Shopify (NYSE:SHOP) is a serious rival to the mighty Amazon (NASDAQ:AMZN) and, despite being only a fraction of the size of its ubiquitous rival, it could do well in this David v Goliath contest, not through a knockout blow but by finding a lucrative niche.

Amazon has been able to outmuscle would-be rivals, but it has attracted criticism for allegedly restrictive practices, high charges and low tax payments. A cheaper, more flexible rival has a genuine opportunity to sneak in under Amazon’s radar. Amazon has a reputation for setting up in competition against companies that sell successfully on its site; Shopify may succumb to that temptation eventually but at least, for the foreseeable future, it has enough on its plate helping its clients to conduct their businesses in peace. 

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Shopify offers an e-commerce platform for small and medium-sized businesses, the very companies that do not have the financial muscle or IT expertise to do it for themselves on a standalone basis. 

These companies had been left behind in the online sales revolution, but many have found over the past few months that they need to find new ways to sell their products and services as the pandemic has altered consumer behaviour and reduced footfall in stores. 

The need to adapt is quickly sorting out winners and losers. Shopify provides that option while giving clients a clear overview of their business and customers.

There are two offerings. Subscription services is the smaller segment but arguably the one with the greater growth potential. It allows business owners to carry out e-commerce, not only on Shopify’s website, but also on social networks, including Facebook, and in physical stores such as kiosks and pop-up stores. It even helps clients to sell on Amazon.

Merchant solutions provides add-on services including shipping products and processing payments. 

A trading update for the third quarter reflected the flight to online sales during lockdowns. Shopify helped to shift goods and services worth $30.9 billion, more than double the $14.8 billion figure for the second quarter. Shopify’s own income rose from $391 million to $767 million. 

Source:  interactive investor. Past performance is not a guide to future performance.

Negative cash flow has turned to a positive figure. That is important, because all cash is being ploughed back into the business to develop new services or increase marketing spend. As with other tech giants, the early days are all about improving visibility and growing revenue rather than rewarding shareholders.

It is admittedly possible that the move to trading online will slow down substantially when the Covid-19 pandemic is over. News of a vaccine possibly being available in spring – or even next month – will prove this one way or the other. The initial impact has been a severe blow to Shopify’s share price. However, as many consumers who previously indulged in no or limited online shopping have caught the bug, this phenomenon is not going to go into reverse. Rather it is going to grow.

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The shares are not cheap. They have risen from $350 in March to top $1,100 over the summer, but they have slipped back lately, despite the great third-quarter figures, to stand below $900, where they found support in September.

Hobson’s choice: It will be some time before shareholders enjoy the spectacular gains seen during the summer months, but the latest dip does represent a buying opportunity for those who invest for long-term capital growth rather than income. We could be at the bottom of the latest trough. Buy up to $950.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.