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Should You Buy Shopify (TSX:SHOP) Ahead of Earnings?

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After a prolonged uptrend that saw its stock price almost triple, Shopify (TSX:SHOP)(NYSE:SHOP) has taken a reprieve. Since topping out at $543 per share at writing, Shopify has been consolidating around the $400 mark. Next on deck for the company will the release of third quarter results on October 29. Is now the time to buy Shopify?

First, it’s important to point out the company’s incredibly reliable earnings history. Since going public in 2015, Canada’s tech darling has never missed on earnings or revenue.

In fact, it has beat on both the top and bottom lines in every quarter — that’s 17 straight quarters of outperformance and is a big reason why Shopify has been Canada’s best tech stock.

Since its IPO, the company has returned 1,079%. A $10,000 investment in the company just over three years ago would be worth $107,000 today.

Analysts expect earnings of $0.10 per share and revenue of $364.61 million, which would represent growth of 150% and 35% over the third quarter of 2018. Interestingly, revenue estimates are below the company’s mid-range guidance for $379.5 million.

This means one of two things: either the analysts still haven’t figured out how to forecast Shopify’s financials or the company will miss its own guidance.

Will the company beat earnings? If history is any indication, a beat is most likely. Shopify’s whisper numbers also point to a positive quarter. For those unfamiliar with a company’s whisper numbers, they are estimates based on investment professionals.

Since their inception, whispers have been more accurate than analysts estimates more than 70% of the time. Shopify’s whisper numbers call for earnings of $0.16 per share on revenue of $381.46 million. Although the earnings per share number might be a little optimistic, the revenue target is within the company’s guidance.

Should the company beat again, investors can expect an upwards revision to full-year guidance for revenue of $1.52 billion.

Expect a big price swing

The day of earnings is usually a big one for this cloud giant. It’s typical for the company to post double-digit swings, one way or the other. This is important to note, as a beat does not necessarily mean a big move upwards.

Case in point, although fiscal 2019 second quarter results topped estimates it was the start of its current downturn. Why would a company drop if it posted a strong quarter? Two reasons: valuation and a downward revision to guidance.

With respect to Shopify, it was a perfect storm. The company was trading at 52-weeks highs and valuations were getting stretched. Similarly, although full-year revenue guidance was revised upwards, it guided to a greater-than-expected GAAP operating loss.

The company’s lack of profitability has been the single biggest knock on the company. As such, it wasn’t surprising that investors took some money off the table.

At today’s prices, you might be surprised to know that Shopify actually provides decent value. It’s trading at its cheapest price-to-cash flow ratio since going public, and at 22 times 2020 sales, it isn’t nearly as expensive as when it hit 30 times sales this past August.

That said, it certainly isn’t cheap, and investors should be aware that an earnings miss to the downside will most likely mean double-digit losses.

There is considerable risk with an investment in Shopify. In a bear market, high-growth stocks tend to get punished and the tech industry is usually one of the first to fall.

That said, with greater risk comes greater reward. As Shopify has consolidated recently, it is primed for a big move upwards if it has a strong third quarter.

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.

Fool contributor mlitalien owns shares of Shopify. Tom Gardner owns shares of Shopify. Shopify is a recommendation of Stock Advisor Canada.

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