Is it Still Time to Buy Shopify (TSX:SHOP)?

Shopify Inc.’s (TSX:SHOP)(NYSE:SHOP) earnings report turned its bull run into a bull sprint, but this stock could be in for a rude awakening.

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For those of you who bought this stock last summer, you must be doing a lot of gloating right now.

Shopify (TSX:SHOP)(NYSE:SHOP) may have had a wild ride, but as of writing this stock has simply skyrocketed to $345 per share.

This is after a stellar earnings report that had investors thinking it’s only the beginning for this popular stock. But is it?

There were a few things to take away from the latest report, and while most of them were positive, other points may be trending towards a downshift before the next uptick in share price.

The bullish view

So, let’s start with that earnings report. Shopify reported revenue of $320.5 million or, the headline you most likely saw, up 50% year over year. This beat not only analyst estimates, but the company’s too.

Subscription revenue grew 40% year over year to $140.5 million, which included the recurring revenue that is now up 36% compared with the prior quarter and now represents 14% of total revenue. Finally, merchant solutions also rose 58% year over year to about $180 million. This has the company lifting its 2019 outlook to $1.5 billion in revenue and for the second quarter alone to $350 million.

Part of that growth in revenue comes from the business expansion itself. The company has expanded into shipping, payments, and capital, now offering everything from purchasing to loans through its site. Analysts see this merchants solution segment as the largest opportunity for Shopify, and this quarter proved that. Once even more larger businesses get on board, this segment’s revenue should skyrocket.

The bearish view

It’s not all good news, and honestly, many analysts believe this stock is coming towards not just a dip but a pure plunge. Granted, Shopify is in its infancy and has a long way to grow, but it has a long way to go as well when it comes to fighting back already established brands like Facebook and Amazon.

Then there’s the type of merchants it has. While it’s continuing to expand into the enterprise clientele market, the ones it already has have been less quality, with even some accused of “dropshipping” cheap products into the U.S.

And, of course, the earnings report did have a few flags. For instance, costs of goods rose by 55%, resulting in a lower margin, operating expenses grew higher than sales, and general and administrative expenses climbed steeply by 68%. All this points to while an increase in revenue is good, and so is expansion, it’s not great if you can’t keep costs under control.

In fact, shareholders should be worried that what it’ll mean is no profit reported from this company for quite some time. While everything grows higher, net loss was still reported at $1.5 million. That number could grow even larger as the company continues its expansion, especially into the television and film industry.

Foolish takeaway

While Shopify still has a great future ahead of it, I think it’s definitely headed towards another dip. If you look at its historical performance, when the markets dropped Shopify plunged with it. In the summer, it reached $225 per share only to drop down to $166 at its lowest. Since then, it’s been on a steady climb to where it is now near $350, but should a recession hit that number will likely plummet.

Analysts believe when its down dropping, that share price could close to $200-$250 per share. When it hits those numbers, however, it’ll provide the perfect time to buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor Amy Legate-Wolfe owns shares of Shopify. David Gardner owns shares of Amazon and Facebook. Tom Gardner owns shares of Facebook and Shopify. The Motley Fool owns shares of Amazon, Facebook, Shopify, and Shopify. Shopify is a recommendation of Stock Advisor Canada.

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