All eyes were focused Shopify (NYSE: STORE) last week when it reported its first-quarter earnings results. As the stock rose more than 120% in the run-up to the earnings release, investors had high expectations, meaning the weak outlook had serious consequences. Shopify shares have fallen 24% since then.
Is this short-term dip a buying opportunity? Let's see how Shopify is doing and where it's likely going.
An e-commerce empire
Shopify is a global leader in e-commerce software, and its platform accounted for 28% of the US market in 2023. It has millions of customers who rely on it to run their online businesses, and it has expanded in several important directions.
For example, it now offers individual services such as payment processing tools or cross-border trading solutions to companies that do not need the entire platform.
That ties into the second big move: Shopify is expanding its reach from small businesses to large enterprises, including names like Tapestry's Coach and Past's Overstock.com.
Payment processing is also becoming a big part of the business model. The Shop Pay option, which competes with Alphabet's Google Pay makes it easy to pay with one click, and you can even opt for a buy now, pay later plan.
Payment processing, reported among Merchant Solutions revenue, makes up a significant portion of Shopify's revenue and continues to grow steadily. First quarter gross payment volume (GPV) increased 60% year over year and Shop Pay accounted for 39% of GPV.
Shopify is also growing its revenue through a focus on international business and an in-store presence, evolving from an acute focus on e-commerce to a total retail specialist.
Business is going well… for now
First quarter results were strong across the board. Revenue rose 23% year over year to $1.9 billion. Gross profit rose 33% to $957 million, while gross margin grew from 47.5% to 51.4%.
Free cash flow nearly tripled to $232 million, and operating income of $86 million erased the $193 million loss a year ago.
Shopify is still experiencing profitability issues that it is trying to get under control. The company overextended itself during the pandemic before announcing large-scale layoffs, like many other companies. And the company is still absorbing the impact of the sale of its logistics business.
Net income was a loss in the first quarter, but adjusted earnings per share (EPS) – excluding the impairment related to the logistics business and other adjustments – was $0.20, better than the Wall Street consensus of $0 ,17.
However, analysts were disappointed with expectations for the second quarter, which called for a sequential decline in gross margin.
Management expects revenue to grow at a strong pace, in line with Wall Street consensus, but still a slowdown from last quarter.
Are Shopify Stocks a Buy or a Bust?
Shopify stock was particularly susceptible to a post-earnings sell-off due to its expensive valuation, although it has retreated from 13.6 times trailing-12-month sales to 10.2. There are still high expectations built into that valuation, and the company has little wiggle room to disappoint investors.
So is it a bargain now? I find it difficult to call a double-digit price-to-sales (P/S) ratio a bargain at any growth rate, but certainly not at the rate at which Shopify is growing. There are other companies that are growing faster and making profits at the same time. To consider MercadoLibre stockwhich trades at a price/earnings ratio of just 5.5.
Management laid out a compelling growth path at its 2023 investor day, and it appears Shopify still has an incredible opportunity ahead. But at this valuation it is sensitive to exactly the kind of reaction it received after last week's report. Investors should keep Shopify on a watchlist for now.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool's board of directors. Jennifer Saibil has positions in MercadoLibre. The Motley Fool holds positions in and recommends Alphabet, MercadoLibre, and Shopify. The Motley Fool recommends Beyond, Inc. and Tapestry on. The Motley Fool has one disclosure policy.
Shopify stock is falling like a ton of bricks. Is this an opportunity to buy on the dip? was originally published by The Motley Fool
