Buying stocks on a pullback, rather than chasing at new highs, is what's coined as a “Buy-the-dip” strategy. Usually, this strategy pays off long term, but in some cases, the payoff can be immediate when the market senses a bargain too good to last. This has been the case for popular e-commerce platform operator Shopify Inc. (NYSE: SHOP) after its stock plummeted by nearly 30% following its Q1 2024 earnings report. Once Shopify shares bottomed at $56.31, the stock managed to rise for 12 straight days, indicating the initial sell-off was an overreaction.
Shopify operates in the computer and technology sector and competes with digital marketplace e-commerce platforms, including Amazon.com Inc. (NASDAQ: AMZN), Block Inc. (NYSE: SQ), and Etsy, Inc. (NASDAQ: ETSY).
Shopify is the All-In-One Platform for Online Stores
Shopify offers an all-in-one e-commerce platform enabling businesses to build and manage a digital storefront complete with user-friendly tools, payment processing, logistics, buy-now-pay-later (BNPL) powered by Affirm Holdings Inc. (NASDAQ: AFRM), and custom design templates. Having fully integrated functions in one platform under subscription plans makes it cost-effective and efficient for merchants to use Shopify. Its artificial intelligence (AI) tools enable merchants to auto-write product descriptions and set the tone like "Sophisticated."
Catering to Small and Medium Sized Businesses (SMB)
While Shopify doesn't provide stats on the percentage of small to medium-sized businesses (SMBs) on the platform, it is generally understood that most of the merchants are. The monthly subscription plans range from $39 up to $2,300 a month, catering to SMBs and enterprises. Annual prepaid plans are available at a discount to the monthly rates.
In Q1 2024, Shopify added a web performance dashboard, email capture at point-of-service (POS) checkout, and additional embedded AI tools. While most Shopify merchants are on its digital marketplace platform, it also enables merchants to grow offline in-store business as well with its POS products.
Large Businesses are Also Accommodated
Enterprise-level brands are also flocking to Shopify. Its Shopify Markets Pro is an add-on service that enables companies to enter global markets to help increase global presence and sales. It automates critical functions like calculating and collecting duties and import taxes, automates conversion rates, and provides express shipping, post-purchase customer support, and fraud protection. Large enterprises like Overstock.com launched in less than 100 days, while Bark Box is expected to launch in 2025.
Earnings Were Robust in Q1 2024
Based on the reaction, you’d think Shopify had bombed their Q1 2024 earnings results, but quite the contrary. Shopify reported Q1 2024 EPS of 20 cents, which beat consensus estimates by 3 cents. Revenues grew 23.4% YoY to $1.86 billion, beating $1.84 billion consensus analyst estimates. Gross profit rose 33%, and free cash flow margin doubled to 12% YoY.
Double Digit Growth Metrics Throughout the Quarter
Merchant Solutions revenue climbed 20% YoY to $1.4 billion, driven by the continued penetration of Shopify Payments, its payment processing service, and the growth of GMV. Gross merchandise volume (GMV), which represents the total value of all the products sold during the quarter, grew 23% YoY to $60.9 billion. It’s office line GMV rose 32% YoY. Subscription Solutions revenue grew 34% YoY to $511 million, driven by the growth in the number of merchants and higher subscription prices. Monthly recurring revenue (MRR) grew 32% YoY to $151 million. Business-to-business (B2B) GMV rose 130% YoY after doubling in 2023.
Guidance was Soft for Q2 2024, Causing Shares to Plummet
While the earnings for Q1 were impressive, Shopify provided soft guidance for Q2 2024. Revenues are expected to grow in the high-teens YoY, translating into a YoY growth rate of low to mid-twenties when adjusting for the 300 to 400 bps impact from the sale of its logistics businesses. Gross margin is expected to fall by 50 bps sequentially. GAAP operating expenses will be up a low-to-mid single-digit percentage rate, sequentially translating from 45% to 46%. Stock-based compensation (SBC) is expected to be around $120 million, and capex around $5 million.
Shopify President Harley Finkelstein was upbeat: “You're seeing the strongest version of Shopify in our history. Our outstanding Q1 performance is clear proof of our dedication to the new shape of Shopify, our commitment to operating with a consistent team size, and our focus on building for the long term to deliver both growth and profitability.”
SHOP Stock Forms a Rounding Bottom Pattern
The daily candlestick chart for SHOP depicts a rounding bottom pattern. SHOP gapped down from $75.30 to $64.86 after its earnings release. This sets the gap-fill price levels. SHOP continued to sell off until it made a final bottom at $56.31 on May 28, 2024. For the next 12 days, SHOP rose higher and peaked at $68.21 on June 14, 2024, before leveling off. The daily relative strength index oscillated from the oversold 30-band to peak near the 65-band before pulling back down towards the 50-band, where it is attempting to coil. Pullback support levels are at $64.20, $60.03, $56.31, and $53.88.
The Analysts Sound the Upgrade Bells
Analysts were all over the place about Shopify’s performance after earnings. On May 9, 2024, Piper Sandler upped its rating to Neutral with a $63 price target. JMP Securities raised its rating to Outperform with an $80 price target. On May 22, 2024, Goldman Sachs raised its rating to Buy with a $74 price target, up from $64. On June 6, 2024, Moffit Nathanson cut its rating to Neutral with a $65 price target.
On July 11, 2024, JP Morgan starts coverage with an Overweight rating and a $74 price target. On June 14, 2024, Evercore ISI raised its rating to Outperform with a $75 price target. This was the rally's final day, as shares peaked at $68.21 before tipping over to retest the $64.20 gap-fill level. Shopify analyst ratings and price targets are at MarketBeat. The consensus price target is 17.46% higher at $76.39.
