Shopify (NYSE:SHOP) stock has performed well so far this year. That’s not surprising.
A combination of better-than-expected results in recent quarters, alongside excitement over potential AI-related catalysts, explain the nearly 75% move higher SHOP stock has made since January.
However, while this stock has been a top performer year-to-date, more recently, its performance has been more mixed. The stock experienced a noticeable post-earnings decline back in August, and since May has effectively traded sideways.
Much like the rally, this pullback makes sense as well. The market’s enthusiasm for all things AI has cooled down since July. There have also been renewed concerns about macro factors like interest rates and economic growth.
With this, after a strong performance earlier this year, is another pop in store for SHOP, or is the stock more likely to experience a sharp drop? Let’s dive in, and find out.
SHOP Stock: A Justified Comeback
To the skeptics, Shopify’s strong stock price performance may seem like little more than “AI mania” spilling over into stocks that have some, but not a lot, of upside potential from this secular growth trend.
However, while the potential positive impact of generative AI technology on future results undoubtedly played a role in the big run-up of SHOP stock, don’t consider it the root cause. Again, chalk it up mostly to the company’s convincing performance in recent quarters.
As I discussed back in May, Shopify has knocked it out of the park during Q1 2023, in terms of gross merchandise volume, revenue growth, not to mention reaching positive earnings and free cash flow.
For Q2, this trend continued. During the quarter ending June 30, 2023, Shopify reported an acceleration in revenue growth, as well as a better-than-expected level of adjusted earnings.
Better yet, efforts like the sale of the company’s logistics business, alongside downsizing related to this divestiture, may bode well for results in subsequent quarters.
While there may be a path for the stock to soon get back on an upward trajectory, I will admit certain factors may lead to additional volatility in the near-term.
Macro and Valuation Concerns
With SHOP stock, the primary concerns at hand right now have to do with macro uncertainties. Valuation concerns are also something that may affect the performance of shares for the rest of 2023, and perhaps during the early months of 2024 as well.
The company may be on track to live up to/beat its Q3 2023 guidance. Growth may come in the low-20s range, with incremental improvements to gross margins. Looking to Q4 2023 and beyond, though, a lot hinges on where the economy heads from here.
If more signs point to a recession taking shape either late this year, or early next year, SHOP could move lower, as management and/or analysts dial back expectations.
Even if macro-related issues have a minimal negative impact on results, keep in mind that the stock today trades for 118.8 times estimated 2023 earnings.
To sustain its current stock price, much less move higher, Shopify may really need to knock it out of the park, earnings-wise.
Not only that, irrespective of future earnings beats, if elevated interest rates persist, the market may become less inclined to price the stock at such a high forward multiple.
With convincing arguments to be made for both the bull and bear case in the near-term, what’s the best move today with SHOP? It all depends. Are you valuation-conscious and/or particularly concerned about a recession? If so, feel free to skip out on it.
That said, if you are in neither of these categories, you do not need to stay away as well.
Let’s say you believe that this e-commerce powerhouse will be resilient in a downturn, and that high growth will enable it to sustain its current valuation.
If this sounds like you, there may be merit in eventually making this a buy. However, even if you’re bullish that SHOP stock will stay a winner, consider it best to ease into a position.
Waiting for major weakness is an even better move.
SHOP stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.