Shopify Inc. (SHOP) is a cloud-based, multi-channel commerce platform for small and medium-sized enterprises. The firm provides subscription solutions as well as merchant solutions. Merchants use the company's software to run their businesses across multiple sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces.
The company’s shares have plunged 80.1% over the past year and 77.1% year-to-date to close its last trading session at $31.55. In addition, its shares are currently trading 82.1% below their 52-week high of $176.29.
SHOP recently announced a strategic partnership with Alphabet Inc.’s (GOOGL) YouTube. According to Reuters, the collaboration with YouTube came only a month after Shopify introduced new features that allow merchants to transact business with people on Twitter (TWTR).
However, the company is under pressure to combat the post-pandemic slump in online sales. According to Reuters, it has lost its position as Canada's most valued company. It has also lost more than three-quarters of its worth with stagnating online sales.
Here's what could shape SHOP's performance in the near term:
Premium Valuation
In terms of forward non-GAAP P/E, the stock is currently trading at 319.24x, 1723.6% higher than the industry average of 17.51x. Also, its forward Price/Sales of 6.92x is 153.4% higher than the industry average of 2.73x. Moreover, SHOP's forward EV/Sales of 5.87x is 114.1% higher than the industry average of 2.74x.
Inadequate Financials
SHOP's revenue increased 21.7% year-over-year to $1.20 billion for the first quarter ended March 31, 2022. Its operating loss came in at $97.97 million, compared to an operating income of $118.89 million in the prior-year quarter. The company reported a net loss of $1.47 billion, compared to a net income of $1.26 billion in the first quarter of 2021.
Negative Profit Margins
SHOP's trailing-12-month net income margin of 3.8% is 19.6% lower than the industry average of 4.7%. Also, its trailing-12-month ROA, ROC, and ROE are 47.3%, 87%, and 72.1%, lower than their respective industry averages. Moreover, its trailing-12-month asset turnover ratio of 0.43% is 33.5% lower compared to its industry average of 0.64%.
POWR Ratings Reflect Bleak Outlook
SHOP has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. SHOP has an F grade for Stability, Value, and Quality. The stock beta of 1.83 is consistent with the Stability grade. The company’s higher-than-industry valuation justifies the Value grade. In addition, poor profitability is in sync with the Quality grade.
Of the 30 stocks in the F-rated Internet – Services industry, SHOP is ranked last.
Beyond what I've stated above, you can view SHOP ratings for Growth, Momentum, and Sentiment here.
Bottom Line
SHOP’s poor top-line and bottom-line performance and premium valuations are concerning. Furthermore, analysts expect its EPS to decline by 89.7% in the current quarter ended June 2022 and 87.8% in the current fiscal year.
In addition, the stock is currently trading below its 50-day and 200-day moving averages of $34.93 and $84.97, respectively, indicating a downtrend. So, we think the stock is best avoided now.
How Does Shopify Inc. (SHOP) Stack Up Against its Peers?
While SHOP has an overall F rating, one might want to consider its industry peers, Perion Network Ltd. (PERI), Liquidity Services Inc. (LQDT), and Shutterstock Inc. (SSTK), which have an overall B (Buy) rating.
SHOP shares fell $2.53 (-8.02%) in premarket trading Wednesday. Year-to-date, SHOP has declined -77.09%, versus a -17.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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