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Here's My Top Stock for February

By Jeremy Bowman - Feb 5, 2018 at 9:03PM

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After a strong start to the year, this e-commerce specialist looks ready to step on the gas.

We're only a month into the new year, and e-commerce stocks are already flying out of the gate following a blowout (AMZN -2.49%) and eBay (EBAY -2.34%), the two biggest vendors in the industry, both surged on strong fourth-quarter earnings reports, and those two stocks, along with WayfairMercadoLibre, and Shopify (SHOP -5.48%), are all up double digits year to date.

With all indicators showing that the holiday season was a big one for online retail, Shopify looks like great stock to buy heading into its upcoming earnings report on Feb. 15. Let's take a closer look.

A man holds a credit card as he prepares to make a purchase on a tablet.

Image source: Getty Images.

E-commerce is picking up steam

The reports from Amazon and eBay should bode well for Shopify, whose merchants favor such platforms. Amazon saw 25% growth in its North American online sales over the fourth quarter,  while eBay said gross merchandise volume increased 10%, and offered better-than-expected guidance for the current quarter and full year. 

In addition, third-party reports indicated a rising tide across retail, as brick-and-mortar chains seemed to benefit from an increase in online sales as even struggling department-store chains posted increases in comparable sales over the holiday season in spite of declining store-based sales. According to data from Mastercard'sSpendingPulse, online sales rose 18.1% during the key selling period, outpacing its average growth rate since the recession around 15%.

ShopperTrak, a retail analytics specialist, found that retailers' strong holiday results came even as store visits declined, as it said online sales over Black Friday increased 17% while foot traffic was down 1.6%, offering further evidence for the growing importance of the online channel.  

How Shopify wins

Shopify is not an online retailer but rather the leading provider of e-commerce software platforms for small and medium-sized businesses, and the growth in e-commerce has attracted a surge in sellers to the platform. In the company's second-quarter earnings report in August, management said the number of merchants had jumped 67% from the year before to more than 500,000. Most of its merchants sell on Amazon,  a bullish sign, as Amazon is seeing revenue from third-party sellers outgrow its own direct sales. Revenue from Amazon's third-party seller services jumped 41% in the fourth quarter to $10.5 billion. 

As a subscription business, Shopify doesn't have the same degree of seasonality as retailers like Amazon do, but its sales generally rise in the fourth quarter, as its Merchants Solutions segment is directly tied to merchant sales and increase alongside it. The company has already given a hint that it had a strong holiday season, saying that its merchants sold more than $1 billion worth of goods over the Black Friday weekend,  with sales peaking at more than $1 million in transactions in just a minute.

The company also got a vote of confidence recently from none other than Apple (AAPL -1.80%). CEO Tim Cook visited the company recently and saw a demo that combined augmented reality with virtual reality (VR) to allow a merchant to interact with a customer using a VR headset.

The next report could be huge

Shopify's revenue growth has been stellar since the company's IPO in 2015, but the key figure has steadily decelerated in recent quarters, slowing to 72.2% in the third quarter. However, analysts expect revenue growth to slip all the way to 60% in the fourth quarter, which seems like a mistake given the company's strong Black Friday weekend performance and bullish signals elsewhere in e-commerce. 

Shopify is approaching adjusted profitability, as gross margin has begun increasing in 2017 after years of declines. While gross margin generally moderates in the fourth quarter as merchant solutions generate a lower margin than its subscriptions, the company could take an important step toward a profitable 2018 with a strong fourth quarter. Even as high expectations may be baked in after a 27% surge so far this year, a strong round of results and bullish guidance for 2018 would cause the market to lift expectations for the growth stock even higher. With the opportunity in e-commerce looking limitless, Shopify should have more room to run.


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Stocks Mentioned

Shopify Inc. Stock Quote
Shopify Inc.
$31.24 (-5.48%) $-1.81
Apple Inc. Stock Quote
Apple Inc.
$136.72 (-1.80%) $-2.51, Inc. Stock Quote, Inc.
$106.21 (-2.49%) $-2.71
eBay Inc. Stock Quote
eBay Inc.
$41.67 (-2.34%) $-1.00
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$315.48 (-2.20%) $-7.11
Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
$636.87 (-3.52%) $-23.26
Wayfair Inc. Stock Quote
Wayfair Inc.
$43.56 (-9.57%) $-4.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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