Shopify Inc. (SHOP) is a prominent provider of essential internet infrastructure for commerce, providing dependable tools to establish, develop, promote, and manage any size retail business. The company has benefitted from the recent e-commerce boom, establishing a solid footing in the sector.
However, its shares are down 77.8% over the past year and 76.2% year-to-date to close yesterday’s trading session at $328.25. The stock has plummeted due to worries about the company's sluggish growth following the pandemic as it faces escalating competition.
At its annual meeting in early June, SHOP shareholders approved a stock split of 10 for 1. The stock split will go into effect on June 28 and start trading on a split-adjusted basis on June 29.
Although its shares are much off their recent highs of $1762.92, they still seem a tad expensive at the current price level. The company anticipates that a lower share price would increase the stock's appeal and accessibility to potential retail investors, which will help the price trend higher.
Here's what could shape SHOP's performance in the near term:
Inadequate Financials
SHOP's revenue increased 21.7% year-over-year to $1.20 billion for the first quarter ended March 31, 2022. However, its loss from operations came in at $97.98 billion, compared to income from operations of $118.89 billion in the prior-year period. 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. Its loss per share amounted to $11.70.
Negative Profit Margins
SHOP's trailing-12-month net income margin of 3.8% is 29.5% lower than the industry average of 5.3%. Also, its trailing-12-month ROA, ROC, and asset turnover ratio are 49.2%, 88.6%, and 33.3%, lower than their respective industry averages. Moreover, its trailing-12-month EBIT margin is 76.8% lower than its industry average of 8.2%.
Premium Valuation
In terms of forward Non-GAAP P/E, the stock is currently trading at 344.77x, 1928.4% higher than the industry average of 17x. Also, its forward EV/Sales of 5.83x is 118.5% higher than the industry average of 2.67x. Moreover, SHOP's forward Price/Sales of 7.12x is 168.6% higher than the industry average of 2.65x.
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 a D for Stability, Value, and Quality. The stock beta of 1.82 justifies the Stability grade. The company’s higher-than-industry valuation is in sync with the Value grade. In addition, its poor profitability is consistent with the Quality grade.
Of the 31 stocks in the D-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 stock has declined considerably year-to-date owing to its deteriorating fundamentals. Analysts expect its EPS to decline 86.9% in the current quarter, 85.6% next quarter, and 84.1% in the current year. Moreover, the stock is currently trading below its 50-day and 200-day moving averages of $412.10 and $980.73, respectively, indicating a downtrend. So, given stretched valuation and poor earnings growth, we think the stock is best avoided now.
How Does Shopify (SHOP) Stack Up Against its Peers?
While SHOP has an overall F rating, one might want to consider its industry peers, Liquidity Services Inc. (LQDT) and Perion Network Limited (PERI), which have an overall A (Strong Buy) rating.
SHOP shares were trading at $335.12 per share on Wednesday morning, up $6.87 (+2.09%). Year-to-date, SHOP has declined -75.67%, versus a -21.31% 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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