Insights

Why Shopify Stock Popped Today

What happened

In case you haven’t heard yet, Shopify (NYSE: SHOP) is partnering with Twitter (NYSE: TWTR) to make it easier to shop on social media. So far today, however, this news seems to be exciting investors in Shopify stock more than investors in Twitter.  

As of 2:17 p.m. ET on Wednesday, Shopify shares were up 6%, but Twitter stock was up only 1%.

So what

Twitter announced this morning that Shopify’s merchant customers will be able to connect their Twitter accounts to their Shopify accounts, download a new sales channel app, and use it to sync their product catalogs to Twitter, TechCrunch reported today. Then the merchant (i.e., the Shopify customer) can advertise specific products on Twitter, and when a Twitter user clicks on such an ad, it can complete a sales transaction on the merchant’s own website.  

The new link between Twitter and Shopify’s merchants will be located within a merchant’s Twitter profile. Depending on which tool a merchant chooses for its profile — Shop Spotlight or Twitter Shop — anywhere from 5 to 50 different products can be highlighted and targeted for promotion on Twitter at a time.  

Now what

It’s not 100% clear what the revenue implications are for this deal. It sounds like it will generate a bit of extra advertising revenue for Twitter, and potentially actual sales for Shopify’s merchants, and thus more revenue for Shopify itself. Especially with the actual sales transaction taking place on merchants’ own websites, this seems to be more significant news for Shopify than for Twitter, which explains why Shopify stock is getting the bigger boost today.

The question remains, though, whether the news is significant enough to justify a 6% run-up in Shopify’s stock price. Shares already cost more than 160 times trailing free cash flow, and more than 250 times trailing-12-month earnings. I think that’s a bit of an overreaction to what is little more than an announcement of a pilot project that may or may not work out — for either Twitter or for Shopify.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify and Twitter. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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