Could Shopify Be A Sneaky Pick For Q2?

Key Points

• Shares have been rallying hard since October’s low. 
• Recent comments urge caution in the near-term.
• The longer term opportunity remains strong however. 

A 90% rally since the middle of October should be enough to convince anyone of the bona fides of Shopify Inc. NYSE: SHOP as a top tech recovery stock. At one point last quarter, they were up more than 120%, and though they took a breather after that, the stock’s firmly back in an uptrend now. 

For those of us on the sidelines and looking to bulk up our portfolios with some tech stocks that are outperforming the broader market, you could do worse than one of the world’s foremost e-commerce companies. Their most recent earnings report showed revenue growth of 25% year on year, a surprisingly solid growth number in the face of what can only be called horrible macroeconomic conditions for most of their customer base. 

To be sure, then, the stock itself is performing well from a technical perspective, and the internal engine is ticking over, but there are some question marks on the near-term outlook. It was in this light that the team at Needham initiated coverage of Shopify stock at a bullishly cautious Hold rating. 

Cautious Optimism

Analyst Anna Andreeva and her team noted that the recent price increases should boost earnings in the coming quarters, and the platform's diversification in product offerings has reduced concentration risk. In addition, a new range of beauty and health products along with home appliances has reduced the company's historic over-reliance on apparel. For all that, however, Andreeva highlighted their concerns over margin compression and macroeconomic factors that could limit potential growth. 

It’s also the case that both Amazon Inc’s NASDAQ: AMZN Buy with Prime program and the continuing risk of an inflation-inspired fall in consumer discretionary spending remain as key risks and headwinds to Shopify’s numbers. The cautious outlook echoed that which came from Stifel last month which also came out with a Hold rating on Shopify stock. 

Analyst J. Parker Lane highlighted the large addressable market that sits in front of Shopify, but he lacks total confidence in the company taking advantage of this. Strong competition, along with Shopify’s over-reliance on SMB businesses, which are heavily exposed to macroeconomic risks, are too large to discount fully right now. It’s clear that Shopify is a good thing and has a large opportunity in front of it, but it has work to prove to the bears that it can execute properly. 

Getting Involved

To be fair as well, there are probably a large number of readers who were burned badly when the stock plummeted in the final weeks of 2021. For context, Shopify was just after printing an all-time high at $175 that the stock began its journey down $25, falling nearly 90% in the process before it bottomed out last October. And you’d be right to be nervous about getting involved once again, given that experience. 

But with their shares in so strong an uptrend and revenue continuing to grow in the face of dire macroeconomic conditions, do you really want to bet against Shopify? An upside surprise in an earnings report or any sign of a downturn in inflation would both add some serious fuel to the fire. It may be a while before the stock is trading in the triple digits again, but it’s being quite clear about wanting to get up in that direction and quickly.

Using Marketbeat’s tools, Shopify stock is currently rated as a Hold, so keep an eye on this in the coming weeks. Let’s see if February’s high of $55 can be retaken and what the next CPI figures show. If the right combination of conditions can get into place it’s easy to see Shopify ranking high in the list of Q2 performers.