Shopify Inc. (SHOP), a prominent Canada-based provider of essential internet infrastructure of commerce, beat on the top and bottom lines in the first quarter of fiscal 2024. SHOP reported first-quarter revenue of $1.86 billion, slightly surpassing analysts’ estimate of $1.85 billion.
Moreover, Gross Merchandise Volume (GMV) rose 23% year-over-year to $60.90 billion. Merchant Solutions revenue witnessed a 20% year-over-year increase, driven by the growth of GMV and continued penetration of Shopify Payments. Also, Gross Payments Volume (GPV) rose to $36.20 billion, 60% of GMV, compared to $27.50 billion, or 56%, for the same quarter of 2023.
Further, Shopify’s non-GAAP net income per share was $0.20, compared to the consensus estimate of $0.17.
“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,” said Harley Finkelstein, President of Shopify.
“We are building a 100-year company, and we will continue to remain fiercely agile, capitalizing on every opportunity that accelerates the success of our merchants, enables us to continue to build world-class products, and enhances operational efficiency for better returns,” Finkelstein added.
Despite better-than-expected first-quarter results, the Canadian e-commerce company gave disappointing guidance for the second quarter. SHOP expects revenue to grow at a high-teens percentage rate, which translates into a year-over-year growth rate in the low-to-mid-twenties. That aligns with the consensus revenue estimate for 18.6% year-over-year growth but still indicates a slowdown from recent quarters.
In addition, the company expect its gross margin to decline by nearly 50 basis points compared to the first quarter of 2023 due to the sale of Shopify’s logistics business to freight forwarder Flexport. Its free cash flow margin is expected to be similar to the first-quarter 2024 free cash flow margin.
On a conference call with analysts, SHOP’s executives highlighted that consumer spending in the U.S. remains robust, but “we have factored in headwinds related to foreign exchange from the strong U.S. dollar and some softness in European consumer spending in our Q2 outlook.”
Shares of SHOP have gained 16% over the past month to close the last trading session at $66.37. However, the stock has plunged 15.3% over the past six months and 14.8% year-to-date.
Let’s look at factors that could influence SHOP’s performance in the upcoming months.
Robust Financial Performance
For the first quarter that ended March 31, 2024, SHOP’s revenues increased 23.4% year-over-year to $1.86 billion. Revenues from subscription solutions and merchant solutions rose 33.8% and 19.9% from the prior year’s quarter, respectively. Its adjusted gross profit grew 30.4% year-over-year to $962 million.
Additionally, Shopify’s adjusted operating income was $201 million, compared to an operating loss of $31 million in the previous year’s quarter. Its adjusted net income rose significantly year-over-year to $256 million. Also, its adjusted net income per share attributable to shareholders came in at $0.20, an increase of 1,900% year-over-year.
The company’s free cash flow was $232 million, 169.8% from the prior year’s period. As of March 31, 2024, Shopify’s cash and cash equivalents stood at $1.62 billion, compared to $1.41 billion as of December 31, 2023.
Mixed Analyst Expectations
Analysts expect SHOP’s revenue for the third quarter (ending September 2024) to grow 29.7% year-over-year to $2.07 billion. However, the consensus EPS estimate of $0.23 for the same period indicates a 4% year-over-year decline. Also, the company has surpassed consensus revenue and EPS estimates in all four trailing quarters.
For the fiscal year ending December 2024, Street expects SHOP’s revenue and EPS to grow 20.9% and 34.3% from the prior year to $8.54 billion and $0.98, respectively. In addition, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 20.2% and 28.3% year-over-year to $10.26 billion and $1.26, respectively.
Mixed Profitability
SHOP’s trailing-12-month gross profit margin of 50.65% is 2.5% higher than the 49.43% industry average. Also, the stock’s trailing-12-month EBIT margin of 7.39% is 51.3% higher than the 4.89% industry average. However, its trailing-12-month EBITDA margin of 8.07% is 17.1% lower than the industry average of 9.73%.
Further, the stock’s trailing-12-month net income margin of negative 2.82% compared to the 2.94% industry average. Its trailing-12-month ROCE of negative 2.41% is also unfavorably compared to the industry average of 4.11%.
Elevated Valuation
In terms of forward non-GAAP P/E, SHOP is trading at 67.71x, 183.5% higher than the industry average of 23.88x. The stock’s forward EV/Sales multiple of 9.55 is 225.5% higher than the industry average of 2.93. Likewise, its forward Price/Cash Flow of 63.39x is considerably higher than the industry average of 23.79x.
Moreover, the stock’s forward Price/Sales multiple of 10.02 is 247.1% higher than the industry average of 2.89. Its forward EV/EBITDA of 67.95x is 360.1% higher than the industry average of 14.77x.
POWR Ratings Reflect Uncertainty
SHOP’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SQ has a C grade for Quality, in sync with its mixed profitability. The stock has a C grade for Sentiment, consistent with mixed analyst estimates.
Within the Internet - Services industry, SHOP is ranked #22 out of 28 stocks.
Beyond what I have stated above, we have also given SHOP grades for Growth, Momentum, Stability, and Value. Get all SQ ratings here.
Bottom Line
SHOP surpassed analysts’ estimates for revenue and earnings in the first quarter of 2024. However, the stock plunged significantly after reporting its first-quarter results as Shopify provided weak revenue and profit guidance for the second quarter, unsettling investors.
Even after cutting its workforce by 20% last May, the Canadian e-commerce company still faces an exceptionally high expense structure. Also, Shopify is trading at a premium compared to its peers. Given SHOP’s decelerating profitability, stretched valuation, and uncertain near-term outlook, waiting for a better entry point in this stock seems wise now.
How Does Shopify Inc. (SHOP) Stack Up Against Its Peers?
Given its near-term uncertain prospects, the odds of SHOP outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A (Strong Buy) or B (Buy) stocks from the Internet-Services Industry:
SMIMILARWEB LTD. (SMWB)
Liquidity Services, Inc. (LQDT)
TrueCar, Inc. (TRUE)
To explore more A- and B-rated internet stocks, click here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
SHOP shares were trading at $66.41 per share on Friday morning, up $0.04 (+0.06%). Year-to-date, SHOP has declined -14.75%, versus a 16.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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