Can Shopify’s share price keep rising once lockdowns are lifted?

At a time when e-commerce is experiencing record uptake, it’s unsurprising that we’ve seen increased investor interest in technology platforms like Shopify [SHOP] that enable anyone to set up an online store and sell goods. But how was Shopify’s share price performed in response?

Shopify’s share price has been on a strong run so far this year, seeing the stock gain 121.9% by 22 June’s close.

For the company’s first quarter of fiscal 2020, Shopify posted revenue of $470m, up 47% year-on-year, beating Wall Street expectations of $443m. Meanwhile, earnings per share were $0.19 – a massive EPS surprise on the consensus estimate, which predicted a loss of $0.18 a share. Shopify’s share price has been doing consistently well in recent quarters, and the company hasn’t posted a single negative EPS surprise in the last three calendar years, according to data from Zacks.

Meanwhile, the world’s biggest brick-and-mortar retailer Walmart [WMT] has seen its share price rise just 2.3% in the same period.

What is the connection between Shopify and Walmart’s share prices?

Despite the disparity between Shopify and Walmart’s share prices, 15 June saw both the retailers’ rise 8.5% and 0.2% respectively. This jump followed the announcement of a partnership between the two companies, with Walmart’s online marketplace opening to Shopify’s small business sellers.

The deal is part of Shopify CEO Tobi Lütk’s plan for supporting merchants by “re-tooling our products to help them adapt to this new reality”.

The question remains, though, whether these efforts to expand its product offering will help to strengthen the long-term outlook for Shopify’s share price.

Recurring revenue uncertainty could stall Shopify share prices

The online platform’s recurring monthly revenue — generated by seller subscriptions — was $55.4m, up 25% from the $44.2m posted in Q1 2019. While this increase in recurring revenue suggests stability, the figures also represent a quarter-on-quarter slowdown, according to Marketplace Pulse statistics.

Shopify cited merchants downgrading to cheaper payment plans as one of the main reasons for this decelerating growth. The concern is that, should the US enter a recession, small business merchants will likely be hit hard, and may decide to cancel their subscriptions altogether. This could have a negative knock-on impact for Shopify’s share price, particularly if we see recurring monthly revenue decrease even further.

But new members could be good news for Shopify’s share price

Shopify could, however, report an increase in new merchants for its second quarter, ending 30 June, as more individuals have looked to set up shop online, in order to offset income lost elsewhere. The extent of the impact this could have on revenue depends on a number of factors, including how many merchants convert a free trial into a paid subscription, and which subscription plans they sign up for.

The number of live business merchants, and Shopify’s share price respectively, could also see a boost following the launch of Shop at the end of April. A bit like a virtual personal shopping assistant, Shop recommends products to users based on the brands they’ve previously shown interest in. This could appeal to smaller businesses looking to reduce customer acquisition costs.

Shopify has also been attracting the interest of some big-name brands in recent months. Kraft Heinz [KHC] recently opened an online store powered by the platform, to help customers who were struggling to buy staple goods, such as tomato ketchup and baked beans. If this kind of client acquisition continues, Shopify’s share price could continue to rise.

Looking beyond Q2 – Time to buy Shopify?

Shopify’s Q2 2020 earnings report will be announced later in the summer. Ahead of the quarter-end, Shopify has withdrawn its guidance for the full fiscal year.

According to Yahoo Finance on 22 June, the average among 26 analysts’ estimates puts quarterly revenue for the three months to 30 June at $502.14m, which would represent a 38.7% year-on-year increase. Earnings per share are expected to see a loss of $0.03.

Whether the company surpasses expectations or not, Shopify’s share price is currently considered realistic, and beyond this fiscal year, its prospects are thought to be strong. The general mood amongst analysts is one of cautious positivity.

According to MarketBeat, there are currently 28 Wall Street ratings available for the stock. While the consensus share price target is $655.32 — representing a potential 27.6% downside on 22 June’s closing price of $904.81 — it has just two sell recommendations. Seventeen analysts recommend the stock as a hold, and nine say Shopify’s share price means it’s still a buy.

With Emarketer.com data showing that e-commerce sales will be over $6.5tn by 2023, nearly double the $3.5tn generated by e-commerce in 2019, Shopify’s share price is likely to rise further. For a brief period in June, the company surpassed the Royal Bank of Canada [RY] to become the country’s most valuable stock by market capitalisation.

Brent Bracelin, senior research analyst for Piper Sandler, put the company’s recent performance down to the “great digital awakening” among consumers, who are now more readily buying online. In one of the more bullish moves, the firm upgraded the stock to overweight from neutral. Bracelin also increased the price target from $733 to $843.

“Leveraging a critical footprint as the global retail operating system for one million-plus merchants today with an expanding product offering, Shopify is one of the best positioned digital commerce beneficiaries for the next decade, in our view, with revenue poised to quadruple to $12bn by 2025,” wrote Bracelin in a note to clients.