As the primary earnings cycle of 2024 continues, Shopify (NYSE:SHOP) just stepped as much as the plate with a swing and an apparent miss. The corporate’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 assist merchants arrange e-commerce sites, slimmed down by selling its logistics business last yr. The corporate’s results now provide a litmus test for U.S. e-commerce, and by extension, for the strength of the American consumer.
Nonetheless, even when the buyer is robust, it doesn’t necessarily mean that is an excellent time to go searching for SHOP stock.
Shopify’s ‘strong start’ by the numbers
“Shopify had a robust begin to the yr,” declared Chief Financial Officer Jeff Hoffmeister.
Corporate executives typically boast about their firms’ leads to quarterly press releases, but Hoffmeister actually had some data points to back up his braggadocio.
First, we must always start off with a few metrics that specifically pertain to commerce-related businesses. In the primary quarter of 2024, Shopify’s gross merchandise volume (GMV) increased 23% yr over yr to $60.9 billion. Moreover, its gross payments volume (GPV) grew from $27.5 billion within the year-earlier quarter to $36.2 billion in Q1 2024.
Thus far, so good. Next, Shopify’s monthly recurring revenue (MRR) as of March 31, 2024 increased 32% yr over yr to $151 million. By now, it’s best to have already got an impression that the corporate helped a whole lot of merchants move a whole lot of merchandise in Q1.
Drilling right down to the balance sheet, Shopify’s free money flow (FCF) improved substantially from $86 million within the year-earlier quarter to $232 million in the primary quarter of 2024. Furthermore, the corporate’s FCF margin doubled from 6% in the primary quarter of 2023 to 12% in Q1 2024.
Finally, let’s give attention to the top-line and bottom-line results that investors have to know. Shopify’s total revenue grew 23% yr over yr to $1.86 billion, barely ahead of Wall Street’s call for $1.85 billion. Meanwhile, the corporate 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 definitely different than the market’s immediate, negative response.
“You’re seeing the strongest version of Shopify in our history,” Finkelstein claimed. “We’re constructing a 100-year company.”
That continues to be to be seen, and Wednesday’s SHOP stock traders definitely didn’t envision a massively successful, century-old company. As an alternative, 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 slightly 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 speed of sales growth must even be expected to grow.
Thus, it was a cardinal sin for Shopify to guide for a slowdown in sales growth. Specifically, the corporate’s second-quarter 2024 outlook called for its revenue to “grow at a high-teens percentage rate on a year-over-year basis.”
To place this in context, Shopify’s year-over-year sales growth has averaged around 26% over the past few quarters; as I discussed earlier, the corporate’s revenue grew 23% in Q1 2024.
The truth is, analysts had called for Shopify’s second-quarter 2024 revenue to extend by 19.35% yr over yr. Consequently, the corporate’s “high-teens percentage rate” guidance didn’t impress Wednesday’s stock traders in any respect.
There are also other areas by which Shopify anticipates slow growth or no growth in any respect on a sequential basis. For the present quarter versus the primary quarter, Shopify guided for its gross margin “to diminish by roughly 50 basis points” and for its FCF margin “to be just like Q1 2024 free money 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 make clear this point, I’ll pull out my old calculator and see what the numbers tell us.
Over the past 4 reported quarters, Shopify’s adjusted non-GAAP EPS figures were 14 cents, 24 cents, 34 cents and 20 cents. That adds as much as 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 can be $62/$0.92 or 67.39. In contrast, the sector’s median trailing 12-month non-GAAP P/E ratio is 22.81.
Due to this fact, based on Shopify’s expected slowdown in sales growth and elevated valuation, there’s no have to jump right into a hasty investment with SHOP stock. Just as importantly, investors shouldn’t assume that American consumers will proceed to “shop ’til they drop” in 2024.