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Why Did Shopify’s (TSX:SHOP) Stock Price Rise 10% in July?

Shopify (TSX:SHOP)(NYSE:SHOP) stock is the poster child of the COVID-19 pandemic, which has catalyzed e-commerce and driven the stock to exorbitant levels. The second quarter was a historical one for the company, as its stock rose 118% during that time (50% in April, 18% in May, and 23% in June). However, the stock’s rally slowed in July. It barely managed to rise by 10%.

Shopify’s stock price movement is a reflection of its revenue. The company’s second-quarter revenue rose 97% YoY (year over year) to $714.3 million. On a sequential basis, its revenue rose 53% sequentially, or $244 million. The last time it reported such a high growth rate was in 2015, when it launched its initial public offering (IPO).

Three things you need to know about Shopify’s revenue growth

Shopify earned two-quarters of revenue in a single quarter. Three factors were responsible for the 56% sequential growth in second-quarter revenue.

First, the COVID-19 pandemic has changed buyer behaviour and forced many retailers to open online stores to survive. Its Gross Merchandise Volume (GMV) rose 30% sequentially to $30.1 billion as stores sold 1.5 times more on Shopify than they did in the fourth quarter of last year.

Second, Shopify acted on the pandemic and extended its 14-day free trial to 90 days. This offer lasted till May 31. The number of new stores on the Shopify platform surged 71% sequentially in the second quarter. However, its subscription revenue rose 4.7% sequentially, which shows that most of the new stores were because of the 90-day free trial. The true test of Shopify will be in August when the 90-day free trial ends.

Third, Shopify introduced many features that enhanced its platform, multi-channel capabilities, retail, shipping, and finance. For instance, 39% of physical retailers in English-speaking areas used Shopify’s curbside pickup and our local delivery capabilities. Additional features and rising transactions helped Shopify increase its merchant solutions revenue by 83.4% sequentially to $518 million.

Shopify stock could see a correction in the second half

The factors that are driving Shopify’s revenue are temporary, and accelerated by the pandemic. As the economy re-starts and retailers open their shops, this accelerated growth will fade.

Some early signs of a slowdown were visible in June. Shopify noted that between June 15 and July 19, the conversion of free trial into paid subscriptions was lower than the pre-pandemic level. RBC Capital analyst Mark Mahaney noted that the e-commerce platform’s GMV growth has started to decelerate from June onwards.

However, William Blair analyst Matthew Pfau believes that a significant portion of the GMV growth will stay. This is because the pandemic has increased the penetration of e-commerce among the retailer segments who were reluctant to open online stores.  These retail segments include grocery, furniture, and consumer packaged goods.

It remains to be seen how much of the GMV will stay and how much will vanish. But one thing is certain: Shopify’s revenue is unlikely to grow above 90% in the third quarter. This quarter will see normalization and correction in both revenue growth and stock price.

Shopify declined to provide guidance. It is leveraging its sky-high stock prices and low interest rates, which create a perfect environment to raise capital. Just before the earnings, it filed mixed shelf registration offering to raise $7.5 billion in the capital.

Investors’ takeaway

I have been bullish on Shopify until now. But beyond this point, I would warn of a permanent correction. Even Shopify admits that it is seeing a 2030-level market in 2020.

Shopify stock has been riding on the e-commerce pandemic wave, growing 167% year to date. If you invested $10,000 in the stock at the start of the year, it would now be above $26,500. That’s a pretty impressive growth in seven months. It’s time to cash out some of this profit, as the $1,400 stock price is not sustainable.

Forget Shopify! Here are some growth stocks that have the potential to generate Shopify-like returns.

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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify and Shopify.

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