The Motley Fool

COVID-19: Avoid Shopify (TSX:SHOP) Stock!

Image source: Getty Images.

The COVID-19 pandemic drove stock market values down in a historic plunge during the first quarter of 2020. Shopify (TSX:SHOP)(NYSE:SHOP) stock was no exception. The e-commerce stock was trading for $718.66 on February 19 before it plunged to $458.52 on March 16.

Nonetheless, fortunes improved for loyal investors in Shopify at the beginning of April. The stock’s price rebounded in an incredible ride all the way up to $908.61 as of Friday, April 27. On Monday, the stock corrected downward to $884.90 — $23.71 less than Friday’s closing price.

SHOP Chart

Overall, Shopify stock has increased in value by 71.6%. In contrast, the S&P 500/TSX Composite Index fell nearly 15% year to date during 2020. Those returns are practically impossible to beat.

Risk-conscious investors missed stellar stock returns

Many investors were tragically disappointed that they didn’t have the foresight to buy an e-commerce stock on the onset of the health crisis.

Yo, why didn’t I buy shares of Shopify ONE MONTH AGO?!!!! 😩😩🗑🗑🗑 81% RETURN? Ain’t no savings account giving you that in A MONTH!!

— PrinceDonnell (@PrinceDonnell_) April 20, 2020

It doesn’t take a rocket scientist to predict that stocks like Shopify and Amazon will perform better during government-mandated quarantines, curfews, and social distancing. Still, Not everyone took steps to buy these winning stocks during the COVID-19 crisis. So, why didn’t more people take advantage of this knowledge to make money in the stock market?

Risk. Even when we know that an investment decision has a strong chance of success, many investors are always thinking about the risk of failure. There was always a chance that Shopify may not have succeeded even in an internet-based world like ours.

Should you buy Shopify stock today?

Probably not. Shopify’s profit margin is a low -7.91%. The profit margin is the excess revenue from sales over costs in a business. Thus, Shopify doesn’t actually make any money on its sales. Shareholders are speculating by purchasing stock in a business that may never make any money.

Similarly, the return on equity is a dismal -4.89%. Return on equity measures management effectiveness by quantifying the amount of net income a company earns for each dollar of shareholder equity. A negative return on equity indicates that the money the investors are pouring into the stock is not bringing in any real returns.

The COVID-19 health crisis is unlikely to boost Shopify’s profit margin enough to make this company worth your while.

What do these COVID-19 investors know that we don’t?

I’m sure that there are plenty of reasons why Shopify stock might end up a winner at the end of the day. For one, e-commerce is quickly replacing retail. Moreover, big data is more profitable than oil, and Shopify has access to plenty of it. Nevertheless, BlackBerry investors learned the hard way that putting a trendy new product on the market won’t necessarily make it a winner.

Investors could argue that BlackBerry did everything right during the birth of the smartphone in the early 2000s. Unfortunately for them, Apple did it better and ultimately got the gains. BlackBerry flew up to $238 per share in July 2007 just to subsequently drop to $77.57 in August of that same year. Today, BlackBerry stock sells for only $5.95 per share.

If you are looking for stocks to add to your retirement portfolio while the stock market is still down, it may be best to stay away from stocks with negative profit margins.

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. David Gardner owns shares of Amazon and Apple. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Amazon, Apple, Shopify, and Shopify. The Motley Fool recommends BlackBerry and BlackBerry and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon.

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.