Shopify Stock (SHOP) Fundamental Analysis is “Bearish”

Shopify Stock Slides: Is it a buying Opportunity?

Shopify Financial & Fundamental Analysis

Overview: Shopify Inc., a leading global commerce platform, recently released its Q1/24 earnings results, which were in line with revenue expectations but revealed weaker-than-expected margins and forward-looking guidance. This analysis delves into the company’s financial performance, key metrics, and outlook, along with valuation methodology and associated risks.

Financial Performance:

  • Revenue: Shopify reported Q1 revenue of $1.861 billion, representing a 23% year-over-year (y/y) increase, in line with expectations.
  • Segment Revenue Breakdown: Subscription Solutions revenue reached $511 million, up 34% y/y, while Merchant Solutions revenue totaled $1.350 billion, up 20% y/y.
  • Earnings: The company’s Earnings Before Interest and Taxes (EBIT) of $201 million exceeded expectations, along with Earnings Per Share (EPS) of $0.20.
  • Key Performance Indicators (KPIs): Total Monthly Recurring Revenue (MRR) grew 30% y/y to $151 million, driven by merchant growth and core plan price increases. Gross Merchandise Volume (GMV) and Gross Payments Volume (GPV) both experienced strong growth, surpassing estimates.

Outlook:

  • Revenue Guidance: Shopify’s Q2/24 revenue growth guidance aligns with consensus estimates but falls below analyst expectations, indicating potential concerns about slowing growth.
  • Operating Expenses (Opex): The company expects GAAP operating expenses to increase at a low-to-mid single-digit percentage rate q/q, potentially impacting EBIT margins, which are forecasted to be lower than anticipated.
  • Free Cash Flow (FCF): Q2 FCF margin is projected to be similar to Q1, indicating potential challenges in generating strong cash flows.

Valuation Methodology:

  • Comparable Company Multiples: EV/EBITDA, P/E, EV/FCF, and EV/Revenue are used for valuation alongside Discounted Cash Flow (DCF) and sum-of-the-parts analysis.
  • Investment Risks: Shopify faces competition from new innovations, technology risks, economic factors, regulatory changes, supply chain disruptions, and currency fluctuations.
  • Risks to Price Target: Principal shareholders’ control, potential deceleration in e-commerce spending post-pandemic, competitive pressures, talent retention challenges, technology risks, sector-wide multiple contraction, and foreign exchange exposure pose risks to the price target.

SHOP Stock Forecast

Analyst Target Price and Rating: According to the Shopify Inc stock forecast provided by 25 analysts, the average analyst target price for Shopify Inc is CAD 87.72 over the next 12 months. This suggests a potential downside from the current stock price. Additionally, Shopify Inc’s average analyst rating is Hold, indicating a neutral stance among analysts regarding the stock’s performance.

Stock Target Advisor Analysis: Stock Target Advisor’s own analysis of Shopify Inc indicates a slightly bearish outlook. This assessment is based on a combination of positive and negative signals. Specifically, the analysis takes into account four positive signals and five negative signals related to various factors affecting the company’s performance and market sentiment.

Current Stock Performance: At the last closing, Shopify Inc’s stock price was CAD 105.75. This indicates that the stock is currently trading above both the average analyst target price and the price target advisor’s slightly bearish outlook. Over the past week, Shopify Inc’s stock price has experienced a notable increase of +9.42%, suggesting short-term bullish momentum. Similarly, over the past month, the stock price has risen by +3.38%. Over the last year, Shopify Inc’s stock price has shown significant growth, increasing by +27.35%.

Fundamental Analysis

Positive Fundamentals

  1. Superior Risk-Adjusted Returns: Shopify has exhibited strong performance compared to its sector peers on a risk-adjusted basis over the past 12 months. This indicates that investors have been rewarded for the level of risk taken, placing the stock in the top quartile within its industry.
  2. Positive Cash Flow: The company has maintained positive total cash flow over the most recent four quarters. This suggests that Shopify has the ability to generate sufficient cash from its operations to cover its expenses and potentially invest in growth opportunities.
  3. High Market Capitalization: With a market capitalization of $93.4 billion, Shopify ranks among the largest entities in its sector, positioning it in the top quartile. Companies with high market capitalization tend to enjoy greater stability and investor confidence.
  4. Superior Earnings Growth: Shopify has demonstrated top quartile earnings growth over the past five years compared to its sector peers. This indicates strong profitability and potential for future growth, which is attractive to investors seeking companies with robust earnings performance.

Negative Fundamentals

  1. Overpriced Compared to Book Value: The stock is trading at a premium compared to its peers based on price-to-book value ratio. This suggests that investors are paying a higher price relative to the company’s book value, which may indicate overvaluation.
  2. Overpriced Compared to Earnings: Shopify’s price-to-earnings ratio is higher than its sector median, indicating that the stock may be overvalued relative to its earnings. This could imply that investors are paying a premium for Shopify’s earnings compared to its industry peers.
  3. High Volatility: Total returns for Shopify have been volatile over the past five years, exceeding the median for its sector. Investors should exercise caution and ensure they have the risk tolerance necessary to withstand fluctuations in the stock price.
  4. Overpriced on Cash Flow Basis: Shopify’s price-to-cash flow ratio is higher than its peers’ median, signaling that the stock may be overvalued relative to its cash flow generation. Investors should approach with caution if considering an investment.
  5. Negative Free Cash Flow: The company has experienced negative total free cash flow in the most recent four quarters. This suggests that Shopify may be using more cash than it generates from its operations, potentially limiting its ability to reinvest in the business or return capital to shareholders.

Consideration: Shopify’s Q1/24 earnings results indicate solid revenue growth but raise concerns about margin pressure and future profitability. The company’s ability to manage operating expenses and sustain revenue growth amid evolving market dynamics will be critical. Investors should carefully assess the company’s margin trajectory and execution against its guidance in the coming quarters.

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