It’s been quite the ride for Shopify (TSX:SHOP) investors over the course of 2019. Starting the year at $187, we saw the high-growth tech stock launch to peak highs of $541 in late August. However, the stock has recently dipped nearly 20% to sit at $435 at the time of writing and many investors are wondering if Shopify has the potential to bounce back.
Why has Shopify (TSX:SHOP) dropped?
It’s no question that Shopify is still trading at extensive price levels. The company is trading at nearly 37 times sales and 23 times book value. With high valuations comes the expectation to produce better than expected results. Thus far, Shopify hasn’t disappointed. Over the last four quarters, Shopify has beat analyst estimates on both top and bottom lines, often by wide margins.
In terms of its performance as a growth company, there really isn’t any justification for the fall. However, there are a few key events over the past few weeks that have factored into the stocks free fall over the last month.
Shopify issues share offering
Around mid September, Shopify issued a share offering that would include 2.185 million Class A shares, which were sold by Shopify for the proceeds of nearly $700 million. As you probably know, when share offerings are made, the company’s shares are diluted and as such the stock is subject to inevitable negative price movements as the market digests the shares.
Market sentiment has moved investors out of growth stocks
During times of market instability, investors often exit high risk positions and instead invest in safer, more secure companies. Shopify doesn’t pay a dividend, and probably won’t for the foreseeable future as the company expands its footprint and continues to establish itself as the bonafide leader in the industry. As a result, the stock simply isn’t attractive to investors with a lower risk tolerance.
We’ve seen volatility because of this from numerous tech stocks, including both Shopify and Lightspeed POS (TSX:LSPD).
Is now the time to buy Shopify?
With a few key reasons as to why the stock has fallen this past month out of the way, investors must now ask themselves if the stock is worth the gamble at a somewhat discounted rate.
Shopify is one of the fastest growing companies in the country, reflected by the company’s 47.80% quarterly revenue growth this year. Revenue has grown tenfold since 2014, and analysts expect the company to grow at a rate of 62.50% annually over the next five years.
The acquisition of 6 River Systems in September highlights the company’s ability to spent capital wisely, as it moves forward with its plan to expand fulfillment networks in the U.S. Any stock with this amount of growth in such a short time is going to have all eyes on its performance and managerial decisions. Thus far, it hasn’t really let anyone down.
I could see the stock returning to the mid $500 levels if it continues to provide better than expected earnings and growth numbers. However, a single miss could send the stock plummeting. There is a ton of growth priced into this stock currently, and investors buying in at these price levels really need to believe in the managements ability to execute its growth strategies. Shopify hasn’t given me a reason to believe otherwise yet.
**Daniel Kent is long SHOP.TO