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Shopify Stock Got Slammed, but It’s Still Pricey

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As the first earnings cycle of 2024 continues, Shopify (NYSE:SHOP) just stepped up to the plate with a swing and an apparent miss. The company’s recently published financial results demonstrated significant growth, but its stock still plunged 19% in premarket trading on Wednesday.

Canada-based Shopify, which provides a platform to help merchants set up e-commerce sites, slimmed down by selling its logistics business last year. The company’s results now provide a litmus test for U.S. e-commerce, and by extension, for the strength of the American consumer.

However, even if the consumer is strong, it doesn’t necessarily mean this is a good time to go shopping for SHOP stock.

Shopify’s ‘strong start’ by the numbers

“Shopify had a strong start to the year,” declared Chief Financial Officer Jeff Hoffmeister.

Corporate executives typically boast about their companies’ results in quarterly press releases, but Hoffmeister actually had some data points to back up his braggadocio.

First, we should start off with a couple of metrics that specifically pertain to commerce-related businesses. In the first quarter of 2024, Shopify’s gross merchandise volume (GMV) increased 23% year over year to $60.9 billion. Furthermore, its gross payments volume (GPV) grew from $27.5 billion in the year-earlier quarter to $36.2 billion in Q1 2024.

So far, so good. Next, Shopify’s monthly recurring revenue (MRR) as of March 31, 2024 increased 32% year over year to $151 million. By now, you should already have an impression that the company helped a lot of merchants move a lot of merchandise in Q1.

Drilling down to the balance sheet, Shopify’s free cash flow (FCF) improved substantially from $86 million in the year-earlier quarter to $232 million in the first quarter of 2024. Moreover, the company’s FCF margin doubled from 6% in the first quarter of 2023 to 12% in Q1 2024.

Finally, let’s focus on the top-line and bottom-line results that investors need to know. Shopify’s total revenue grew 23% year over year to $1.86 billion, slightly ahead of Wall Street’s call for $1.85 billion. Meanwhile, the company reported adjusted earnings of 20 cents per share, beating the analysts’ consensus estimate of 17 cents per share.

Shopify CEO Harley Finkelstein’s assessment of the quarterly report was certainly different than the market’s immediate, negative reaction.

“You’re seeing the strongest version of Shopify in our history,” Finkelstein claimed. “We are building a 100-year company.”

That remains to be seen, and Wednesday’s SHOP stock traders definitely didn’t envision a massively successful, century-old company. Instead, they expressed their near-term concerns by dumping Shopify shares.

Shopify anticipates slowing sales growth

As often happens nowadays, short-term stock traders responded to Shopify’s forward guidance rather than its recent results. The market has been spoiled by the unstoppable growth trajectories of juggernauts like Amazon (NASDAQ:AMZN), so anticipated sales growth isn’t enough anymore; the rate of sales growth must also be expected to grow.

Thus, it was a cardinal sin for Shopify to guide for a slowdown in sales growth. In particular, the company’s second-quarter 2024 outlook called for its revenue to “grow at a high-teens percentage rate on a year-over-year basis.”

To put this in context, Shopify’s year-over-year sales growth has averaged around 26% over the past few quarters; as I mentioned earlier, the company’s revenue grew 23% in Q1 2024.

In fact, analysts had called for Shopify’s second-quarter 2024 revenue to increase by 19.35% year over year. Consequently, the company’s “high-teens percentage rate” guidance didn’t impress Wednesday’s stock traders at all.

There are also other areas in which Shopify anticipates slow growth or no growth at all on a sequential basis. For the current quarter versus the first quarter, Shopify guided for its gross margin “to decrease by approximately 50 basis points” and for its FCF margin “to be similar to Q1 2024 free cash flow margin.”

Don’t go bargain hunting with SHOP stock

SHOP stock dropped quickly on Wednesday morning, but investors shouldn’t immediately conclude that it trades at a low valuation. To clarify this point, I’ll pull out my old calculator and see what the numbers tell us.

Over the past four reported quarters, Shopify’s adjusted non-GAAP EPS figures were 14 cents, 24 cents, 34 cents and 20 cents. That adds up to 92 cents, and if we assume a current share price of $62 after Wednesday’s steep sell-off, then Shopify’s trailing 12-month price-to-earnings (P/E) ratio would be $62/$0.92 or 67.39. In contrast, the sector’s median trailing 12-month non-GAAP P/E ratio is 22.81.

Therefore, based on Shopify’s expected slowdown in sales growth and elevated valuation, there’s no need to jump into a hasty investment with SHOP stock. Just as importantly, investors shouldn’t assume that American consumers will continue to “shop ’til they drop” in 2024.