The stock market has rallied since the beginning of the year, with the three major indexes gaining on the back of encouraging commentary on inflation by Fed Chair Jerome Powell. The Dow Jones Industrial Average gained 1.7% year-to-date, while the S&P 500 and the Nasdaq Composite rallied 6.3% and 12.6%, respectively.

Tech and growth stocks have gained this year on hopes that the Fed would stop raising rates earlier than expected. When questioned whether the Fed would stop rate increases before the previously guided median target range of 5% to 5.25%, Powell said, “Absolutely, it’s possible,” depending on inflation and labor market data over the next couple of months.

E-commerce service provider Shopify Inc.’s (SHOP) shares have gained 33.5% in price over the past month and 43% year-to-date to close the last trading session at $49.64. SHOP had witnessed a huge rise in customers during the pandemic. However, the company struggled last year due to macroeconomic headwinds. In the third quarter, SHOP’s loss per share came lower than analyst estimates, while its revenue beat the consensus estimate by 2.3%.

SHOP CFO Amy Shapero said, “In Q3, we delivered another solid quarter of GMV, revenue, gross profit dollar growth against the high inflationary environment. From an operational perspective, we recalibrated our organizational structure, successfully rolled out a new compensation framework, and began integrating Deliverr into Shopify.”

SHOP’s shares jumped as the company announced a price hike after twelve years across its Basic, Shopify, and Advanced plans. While the new rates will be applicable for existing customers from April 23, 2023, the new pricing is already in effect for new merchants. However, its Shopify Plus plan, made for its biggest customers, remained unchanged at $2,000 per month.

Although inflation eased for the sixth consecutive month in December, the economy added significantly higher-than-expected jobs in January. The Fed Chair Jerome Powell warned that if the U.S. job market strengthens further in the upcoming months or inflation rises, then the central bank might have to raise its benchmark rates higher than its projection.

This could spell further trouble for small and medium business owners present on SHOP’s platform, as they might continue to face falling consumer spending on discretionary items. Moreover, with the interest rates climbing higher, small and medium business owners might face difficulty accessing credit at cheaper rates, affecting their profitability.

For fiscal 2022, SHOP expects an adjusted operating loss. For the fourth quarter ended December 31, 2022, the company now expects adjusted operating loss to be fairly comparable to the adjusted operating loss amount in the third quarter.

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

Mixed Financials

SHOP’s revenue increased 21.6% year-over-year to $1.37 billion for the third quarter ended September 30, 2022. The company’s non-GAAP gross profit increased 10.6% year-over-year to $681.79 million.

Its adjusted net loss came in at $30.04 million, compared to an adjusted net income of $102.82 million in the year-ago period. Also, its adjusted loss per share came in at $0.02, compared to an adjusted EPS of $0.08 in the year-ago period.

Mixed Analyst Estimates

SHOP’s EPS for fiscal 2022 is expected to be negative. Its EPS for fiscal 2023 is expected to increase 220% year-over-year to $0.06. Its revenue for fiscal 2022 and 2023 is expected to increase 19.5% and 20.1% year-over-year to $5.51 billion and $6.62 billion.

Weak Profitability

SHOP’s trailing-12-month net income margin is negative compared to the 3.05% industry average. Likewise, its negative 7.51% trailing-12-month EBIT margin compares to the 5.69% industry average. Furthermore, the stock’s 0.42x trailing-12-month asset turnover ratio is 31.6% lower than the industry average of 0.62x.

Stretched Valuation

In terms of forward EV/Sales, SHOP’s 10.79x is 268% higher than the 2.93x industry average. Likewise, its 11.45x forward P/S is 285% higher than the 2.97x industry average. And the stock’s 7.36x forward P/B is 79.4% higher than the 4.10x industry average.

POWR Ratings Reflect Bleak Prospects

SHOP has an overall D rating, equating to 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 weak profitability. Its 1.97 beta justifies its D grade for Stability.

SHOP is ranked #27 out of 29 stocks in the F-rated Internet - Services industry. Click here to access SHOP’s ratings for Growth, Momentum, and Sentiment.

Bottom Line

SHOP shares are trading above their 50-day and 200-day moving averages of $40.74 and $36, respectively. The company’s decision to hike the pricing of its plans is expected to increase its revenues. However, SHOP is expected to remain under pressure due to falling consumer discretionary spending driven by high inflation and rising interest rates.

Given the stock’s stretched valuation and weak profitability, it could be wise to avoid the stock now.

How Does Shopify Inc. (SHOP) Stack up Against Its Peers?

SHOP has an overall POWR Rating of D, equating to a Sell. Therefore, one might want to consider investing in other Internet - Services stocks with a B (Buy) rating, such as Perion Network Ltd. (PERI), Liquidity Services, Inc. (LQDT), and Shutterstock, Inc. (SSTK).

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SHOP shares were trading at $48.26 per share on Friday morning, down $1.38 (-2.78%). Year-to-date, SHOP has gained 39.04%, versus a 6.17% rise in the benchmark S&P 500 index during the same period.

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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