Shopify is due for a pullback, this investor says

Everyone knows that Shopify (Shopify Stock Quote, Chart, News TSX:SHOP) shareholders have made out like bandits in recent years but the trick will be whether or not jumping in now will get you anywhere.

In his assessment, portfolio manager Bruce Campbell says even though the industry trends point to further growth for the company, it’s probably wise to wait for a pullback.

Shopify’s meteoric rise has cooled off in recent weeks, with the stock buzzing around the $1,400 mark since early July, but SHOP’s muscle is undeniable. At a market cap of $175 billion, it’s now miles above Royal Bank, the TSX’s perennial number one which was dethroned in May of this year, with no sign that RBC will take back that crown anytime soon.

Campbell says Shopify’s rise is no surprise, considering the support it’s receiving from pandemic-related lockdowns and work-from-home regulations, which have spurred tremendous growth in the e-commerce sector.

“Through everything that's happened with COVID, more retailers are going online and more retailers are trying to find a solution to how can we sell outside of our physical locations and how can we maximize our profit? And really, that's what Shopify does,” says Campbell, president of StoneCastle Investment Management, who spoke on BNN Bloomberg on Tuesday.

“And that's not a trend that’s going away anytime soon,” he said.

“We probably all recognize that COVID is here for some time yet and it's going to obviously limit our impact to be shopping in stores. We still need to buy those goods and people really love to shop and so they're looking for alternative avenues. And if Shopify can make someone that much more profitable and efficient and sell higher amounts and allow them to survive, then obviously they're happy to pay Shopify,” Campbell said.

That growth was on clear display in Shopify’s second quarter numbers, delivered in late July, where Q2 revenue essentially doubled to $714.3 million from a year earlier and crushed analysts’ consensus estimate of $513.8 million. Adjusted net income also rose from just $10.7 million or $0.10 per share a year ago to $129.4 million or $1.05 per share.

To get a good view of SHOP’s growth, its gross merchant volume over the second quarter shot up 119 per cent to $30.1 billion — that’s an increase of $16.3 billion in one year.

But Campbell thinks Shopify and the rest of the ultra-hot tech stocks are bound to get a bit of a comeuppance before long, leaving the wise move likely to be none at all at the moment.

“Shopify is not one that we own right now but we’ve owned it in the past,” Campbell said. “At some point in time we certainly wouldn't surprised to see a pullback or correction in the large cap tech sector. And when that happens, obviously Shopify being a heavily traded, big company will pull back with all the rest.”

“So, if I didn't own a position right now and if I really wanted to own it, I would probably own a partial position here and then wait for a pullback to add to it,” he said.