This has not been a good week for either Shopify Inc (US) (NYSE:SHOP) or Under Armour Inc (NYSE:UAA). Both of these stocks are trading lower after the release of mixed, or in the case of Under Armour, downright disappointing, third quarter earnings reports. But do these low prices represent a savvy buying opportunity or is it best to steer clear right now? We take a closer look at why these stocks are suffering and their risk/reward ratio here. We also include words of wisdom from those who know best- analysts with proven track records on the stocks in question. Let’s take a closer look now:
Shopify Inc (US)
Shares in Canadian e-commerce company Shopify are plummeting following the release of its third quarter earnings results. The stock is currently trading at $98, down from $109 on October 30.
While the company reported strong results for the quarter, the market nevertheless reacted badly which should give investors some pause for thought. First, on the positive side, revenue came in at a record $171.5 million- up an impressive 72% year-over-year and easily beating the consensus estimate of $166 million. But this good news was overshadowed by the fact that the company posted a Q3 operating loss of $12.7 million. This is because, while sales grew quickly, so did operating costs- up 78% from last year. As a result, Shopify is still losing money- nine cents per share in the third quarter to be precise.
And what is troubling investors is that the situation does not look like it will improve any time soon. “Our focus is not on profitability,” CFO Russ Jones told analysts during the post-earnings conference call. “It’s very much on growth.” This is reflected in the company’s guidance going forward. Shopify is projecting a fourth quarter loss of $12.5 million to $14.5 million. The most worrying part is that- if revenue growth were to slow down- the huge expenses Shopify is racking up would cripple the company.
Also lurking in the background is a Citron Research report by well-known short seller Andrew Left, accusing the company of misleading sellers with get-rich quick style marketing material. He says this constant promotion of the idea that you will become a millionaire if you use Shopify violates rules laid out by the Federal Trade Commission. While shares dropped on the news they subsequently recovered- until the latest blast in the form of the earnings results as noted above.
At this point, even if the Citron Report’s claims are baseless, it appears best to use caution if you are investing in this stock. From TipRanks we can see that SHOP has a slightly optimistic Moderate Buy analyst consensus rating. In the last three months, the stock has received no sell ratings but it has received 8 buy ratings and 5 hold ratings. The average price target from these analysts of $107.67 translates into downside of nearly 2% from the current share price.
However, note that one top analyst, five-star Robert W Baird analyst Colin Sebastian doesn’t seem too concerned. Following the results, he reiterated his buy rating on the stock with a $110 price target (10% upside from the current share price) on October 31. Sebastian says that there is “no change to our positive thesis after another strong quarter.” In particular he likes the “particular strength (accelerating revenue growth) in Subscription Services and strong growth in Merchant solutions.” Note too that so far Sebastian has been very successful with his SHOP recommendations, boasting a very impressive 94% success rate and 89% average return across his 16 ratings on the stock.
Under Armour Inc
Sportswear retailer Under Armour is also feeling the pinch, with tough competition from larger rivals Nike and Adidas showing no signs of abating any time soon. Shares are tanking from $16.40 on October 30, to the current share price of $13.71. This represents a big drop of 16%. It is also a long way off from the start of the year when UA was trading at a bullish $30. The market is very nervy after the company reported its third quarter earnings results which revealed strong earnings but disappointing revenue. Adjusted earnings came in at $0.22 vs the expected $0.19, but revenue of $1.4 billion failed to meet the expected $1.48 billion. The most troubling part is that UA has now drastically reduced its guidance for the full year to $0.18 to $0.20 from $0.37 to $0.40 previously.
“While we like the momentum in direct to consumer, the positive trends in footwear, and the strength internationally, it was more than offset by weakness in North America, softness in wholesale, high inventory, operational difficulties, and a terrible outlook” commented Jefferies analyst Randal Konik. However, the silver lining of such a depressing situation is that the “guidance is lowered so significantly that the company should be able to meet or beat its outlook.”
Meanwhile Piper Jaffray analyst Erinn Murphy is nervous about UA’s increased inventory due to the weak sales with apparel down 8% and footwear down 2%. In a report dated October 31, Murphy writes “Perhaps more concerning than the sales miss was that inventory was up 22% Y/Y exiting Q3–materially increasing the spread vs. the 5% Y/Y sales decline. This inventory position is not good for the overall athletic market in NA [North America] as it will likely continue to impact the promotional environment.” She has a hold rating on the stock with a $14 price target (10.5% upside from the current share price)- which she is now reviewing. So far, Murphy has a strong track record on UA stock with an 86% success rate and 12% average return across her 7 UA recommendations.
The conclusion: even with prices this low this doesn’t seem like a very attractive investing opportunity given the significant hurdles the stock has to face going forward. Indeed, we would say avoid this stock! Overall TipRanks shows that UA has, unsurprisingly, a Hold analyst consensus rating. In the last three months that breaks down into 3 buy, 8 hold and 5 sell ratings. With shares dropping so quickly, the average analyst price target of $18.17 stands at a big upside of 40% from the current share price.