The Motley Fool

Why Shopify (SHOP) Stock Price Rose 20% in January

Image source: Getty Images

January was another exceptional month for Shopify Inc. (TSX:SHOP)(NYSE:SHOP) stock. So what has caused this % January rally and what, if anything, should investors do about it?

Shopify stock price momentum continues

As momentum in the S&P/TSX Composite Index has continued in January, so has the momentum in the Shopify stock price. In fact, as a significant member of the index that currently has a $71 billion market capitalization, Shopify has contributed greatly to its success.

The 20% rise in Shopify stock price has not gone unnoticed. In January, many brokerage firms were faced with the option of either raising their target prices or issuing a sell recommendation on the stock as Shopify stock blew through their price targets.

Most opted for the former. Credit Suisse and National Bank raised their target prices by 20% and 12%, respectively. However, most analysts also include the caveat that Shopify’s valuation implies that much of the good news is already priced into the stock.

Shopify plans expansion to meet booming demand

Shopify’s booming stock price has been backed up by continued strength of its business, and with demand remaining strong, the company is making plans to expand.

According to various news sources, Shopify is planning to hire 1,000 workers and open an office in Vancouver by the end of the year as it positions itself to ward off competition from the likes of Amazon.

With 2019 revenue expected to top $1.5 billion (for a 50% growth rate), Shopify is clearly still in growth mode, and this massive growth will be supported in part by the new Vancouver office.

The competitive environment is changing quickly, and companies like Amazon, Instagram and others are still looming threats. For its part, Shopify feels confident that they have built an ecosystem that enables small and medium-sized business to thrive, making its money off of software subscriptions, payment processing, and other merchant services.

Shopify stock has been soaring since latest quarterly results

October 2019 was the latest quarterly result release from Shopify; the latest glimpse into the company’s financials and operational performance.

In the quarter, everything came in better than expected, with subscription revenue, services revenue, and gross profit all coming in ahead of expectations.

Total revenue increased 45%, with over 30% growth in total merchants, improving net merchant adds, and stable churn, all resulting in a slight increase to the company’s annual guidance. Further upside to revenue in the next few years exists in the company’s under-penetrated international presence.

These results serve to justify Shopify stock’s crazy high valuation levels to a certain extent. For now, however, I expect the competitive landscape will intensify over the next couple of years. While Shopify is certainly the one to beat, this will place downward pressure on an already lofty stock price.

Foolish bottom line

Shopify stock price has once again blown us away with its performance last month. This is a well-deserved result after an excellent job by Shopify. Going forward, while I can easily see continued success for the company along with the building downside risk in Shopify stock.

In closing, I would like to remind foolish investors of our belief in holding great businesses for the long-term. While this belief remains intact, we are also aware that sometimes, short-term stock price movements create opportunities to create wealth.

Blending this long-term focus with a keen eye for short-term stock mispricings, we can use both strategies in harmony, and our quest for financial freedom can be fulfilled.

In the case of Shopify stock, taking some money off the table at this point might be a good move.

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 Karen Thomas has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.