Canada-based e-commerce company Shopify Inc. (SHOP) offers small and medium-sized businesses a cloud-based, multi-channel commerce platform. Although the company’s latest results show an improvement in its top line, softened demand could weigh heavily on its worsening bottom line, as reflected in its soft guidance.
Moreover, given the ever-present risk of technological disruption in an intensely competitive industry, it could be wise to avoid this stock for now.
SHOP offers subscription solutions and merchant solutions. Its platform includes a mobile-optimized checkout system to enable merchants’ consumers to buy products over mobile websites.
The stock has slumped 14.7% over the past month and 25.1% in the past year to close the last trading session at $41.46. It is trading below its 50-day moving average of $43.12, which indicates further downside risks.
Let’s closely examine the fundamentals of SHOP.
Weakening Bottom Line
For the fourth quarter of the fiscal year that ended December 31, 2022, SHOP’s revenue and adjusted gross profit increased 25.7% and 16.9% year-over-year to $1.74 billion and $818.84 billion, respectively.
However, the company’s adjusted operating income and adjusted net income declined 53.1% and 47.4% year-over-year to $60.99 million and $91 million, respectively, during the same period.
SHOP’s adjusted quarterly net income attributable to shareholders halved to $0.07 per share.
For the fiscal year ended December 31, 2022, SHOP’s revenue and adjusted gross profit increased 21.4% and 12.1% year-over-year to $5.60 billion and $2.81 billion, respectively. However, the company’s adjusted operating income and adjusted net income came in at $6.06 million and $47.59 million, compared to $717.99 million and $814.39 million, respectively, during the previous fiscal year.
SHOP adjusted net income for the fiscal year attributable to shareholders came in at $0.04 per share, compared to $0.64 in the previous fiscal year.
Stretched Valuation
Despite the recent downtrend, SHOP is still trading at a premium compared to its peers. Its forward P/E multiple of 1429.16 and forward EV/EBITDA multiples of 3776.29 are exorbitant in comparison to the respective industry averages of 19.06 and 12.66.
Similarly, SHOP’s forward EV/Sales, Price/Sales, and Price/Book multiples of 8.29, 8.84, and 6.59 compare unfavorably to the respective industry averages of 2.68, 2.59, and 3.58, respectively.
POWR Ratings Reflect Fundamental Weakness
SHOP’s overall D rating translates to a Sell in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SHOP has a D grade for Stability, as reflected in its beta of 2.04 and a high spread between its 52-week high and 52-week low prices of $78.00 and $23.63, respectively.
In addition, SHOP has a D grade for Value and Momentum, consistent with its stretched valuation despite the recent downtrend in price action.
Unsurprisingly, SHOP is ranked #25 of 28 stocks within the Internet - Services industry.
Click here to see additional POWR Ratings for Growth, Momentum, Sentiment, and Quality for SHOP.
Bottom Line
For the first quarter of the fiscal year 2023, SHOP has forecasted its revenue growth to be in the high-teens percentage on a year-over-year basis.
With inflation and rising interest rates expected to keep weighing on consumer spending, SHOP is expected to incur a loss of $0.04 per share, compared to an EPS of $0.02 during the previous-year quarter. Despite laying off 10% of its workforce in late July, the company’s EPS for the fiscal year is expected to decrease 27.5% year-over-year to $0.03.
While its current outlook starkly contrasts its pandemic boom, SHOP’s core activities in a softening market have been facing unrelenting pressure from competition on both livestream shopping and logistics fronts, the latter being countered through the acquisition of Deliverr and its partnership with Flexport.
Hence, given SHOP’s uphill task amid macroeconomic headwinds, it could be wise to avoid this overvalued and volatile stock for now.
Stocks to consider instead of Shopify (SHOP)
Unfortunately, the odds of Shopify outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these 3 B-rated (Buy) stocks from the Internet - Services industry instead:
Shutterstock, Inc. (SSTK)
Perion Network Ltd. (PERI)
Liquidity Services, Inc. (LQDT)
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SHOP shares were trading at $41.18 per share on Monday morning, down $0.28 (-0.68%). Year-to-date, SHOP has gained 18.64%, versus a 1.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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