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Shopify (SHOP) Post-Earnings Analysis -- Buy or Sell?

E-commerce major Shopify (SHOP) reported better-than-expected earnings and revenue during the third quarter. The stock has run up more than 70% year-to-date. Is the stock still a buy, or will it be wise to avoid it until it reaches a lower valuation? Read on to learn my view…

Shopify Inc. (SHOP) reported its third-quarter results on November 2. The company comfortably surpassed the consensus EPS and revenue estimates driven by growth in its merchant business. In this piece, I have discussed why it could be prudent to avoid the stock now.

During the third quarter, SHOP’s EPS was 65.8% above the consensus estimate, while its revenue was 2.6% higher than analyst estimates. The company continued its stellar earnings history, beating the consensus EPS estimate in each of the trailing four quarters. SHOP’s President Harley Finkelstein said, “Our third-quarter results demonstrate the progress we are making to further solidify Shopify’s position as the global leader in commerce.”

SHOP’s CFO Jeff Hoffmeister said, “Our results showcased the durability of our business model as we delivered a compelling combination of both top-line growth and profitability, with revenue growing 25% year-over-year and free cash flow margin reaching 16%.” SHOP’s gross merchandise volume (GMV) rose 22% year-over-year to $56.20 billion.

Its gross payments volume (GPV) rose to $32.80 billion, representing 58% of GMV during the quarter, versus $25 billion in the prior-year quarter. In addition, its subscription solutions revenue rose 29% year-over-year to $486 million.

For fiscal 2023, revenue is expected to grow in the 20% to 30% range year-over-year, driven by fourth-quarter revenue growth in the high-teens year-over-year, translating into a year-over-year growth rate in the low-to-mid-twenties when excluding the 400 to 500 basis points impact from the sales of its logistics businesses.

Its fourth-quarter gross margin is expected to be 300 to 400 basis points higher year-over-year. Its fourth-quarter free cash flow as a percentage of revenue is expected to be in the high teens. The company has launched AI-powered tools and offerings such as Shopify Magic suite and app Sidekick to stay ahead of the competition.

SHOP’s stock has gained 72% year-to-date and 78.2% over the past year to close the last trading session at $59.70.

Here’s what could influence SHOP’s performance in the upcoming months:

Robust Financials

SHOP’s revenues for the third quarter ended September 30, 2023, increased 25.5% over the prior-year quarter to $1.71 billion. Its net cash provided by operating activities came in at $278 million, compared to net cash used in operating activities of $134 million. The company’s adjusted gross profit increased 32.9% year-over-year to $905 million.

In addition, its adjusted net income stood at $316 million, compared to an adjusted net loss of $32 million. Also, its adjusted EPS came in at $0.24, compared to an adjusted loss per share of $0.02.

Favorable Analyst Estimates

Analysts expect SHOP’s EPS for fiscal 2023 to increase significantly year-over-year to $0.49. Its fiscal 2023 revenue is expected to increase 24.1% year-over-year to $6.95 billion. Its EPS and revenue for fiscal 2024 are expected to increase 55.1% and 19% year-over-year to $0.76 and $8.27 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, SHOP’s 94.20x is 612% higher than the 13.23x industry average. Likewise, its 10.47x forward EV/Sales is 328.1% higher than the 2.45x industry average. Its 86.68x forward non-GAAP P/E is 314.2% higher than the 20.93x industry average.

Poor Profitability

SHOP’s trailing-12-month net income margin is negative 17.28% compared to the 2.15% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 13.54% compared to the 1.16% industry average. Furthermore, the stock’s negative 10.98% trailing-12-month Return on Total Assets compares to the industry average of 0.31%.

POWR Ratings Reflect Bleak Prospects

SHOP has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SHOP has a D grade for Value, in sync with its stretched valuation. It has a D grade for Quality, consistent with its poor profitability.

SHOP is ranked #20 out of 26 stocks in the D-rated Internet – Services industry. Click here to access SHOP’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

Adopting AI and operational discipline helped SHOP report better-than-expected earnings and revenue for the third quarter. The company believes that consumers remain resilient coming into the holiday season. However, given the uncertain macroeconomic conditions and the stock’s expensive valuation, it could be wise to avoid it now.

Stocks to Consider Instead of Shopify Inc. (SHOP)

The odds of SHOP outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three B-rated (Buy) stocks from the Internet – Services industry instead:

Liquidity Services, Inc. (LQDT)

Shutterstock, Inc. (SSTK) Ltd. (WIX)

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

SHOP shares were trading at $59.60 per share on Friday morning, down $0.10 (-0.17%). Year-to-date, SHOP has gained 71.71%, versus a 15.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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