Shopify Stock Plunged After Earnings. Should I Buy?

Shopify (NYSE: SHOP) stock plunged following its first-quarter earnings. While its 23% yearly revenue growth closely approximated its performance in past quarters, a forecast for lower Q2 revenue growth and a return to net losses appeared to spook investors.

Nonetheless, one can still argue that Shopify is expensive even after the pullback. This leaves investors to question whether this is a buying opportunity or whether they should hold or possibly sell some shares.

Shopify's first-quarter report

For the first quarter of 2024, Shopify reported $1.9 billion in revenue, 23% higher than the same quarter last year.

That did not differ significantly from more recent quarters. However, a charge related to the sale of its logistic business resulted in a generally accepted accounting principles (GAAP) loss of $281 million, down from the $77 million profit in the year-ago quarter.

Moreover, the company also implied that growth was slowing when it forecast a high-teens percentage revenue increase in Q2. While that does not eliminate the possibility it will meet the 21% revenue growth analysts forecast for 2024, it probably tempers expectations.

Additionally, the fact that it sells at a price-to-sales (P/S) ratio of about 11 shows that Shopify remains an expensive stock. That probably puts additional pressure on the company to deliver strong results.

Shopify's vision and competitive edge

Nonetheless, before souring on the stock, investors should keep its business in perspective. CEO Toby Lütke has intended to build a "100-year company" and, so far, appears on track for such growth.

Although numerous companies offer competing e-commerce platforms, Shopify has stood out for offering more tools that allow customers to customize sales sites without having coding knowledge. It also places an added emphasis on speed, as slow sites often cost clients sales.

Customers can also turn to the Shopify ecosystem to address challenges in running an e-commerce platform. Its services vary from handling payments to managing inventory, including items sold offline. Services are also available to help businesses raise capital, run email marketing campaigns, and handle other tasks.

Admittedly, Shopify's attempt to build a logistics network was also part of this plan. That effort proved too costly and took what had been a profitable company back to losses.

Still, despite that misstep, Shopify is the leading e-commerce platform in the U.S. According to data company Yaguara, Shopify holds a 29% market share in the U.S. Globally, it is in fourth place with a 10% market share.

Moreover, Grand View Research estimates a compound annual growth rate for the global e-commerce industry of 11% through 2030. That industry growth makes it likely that Shopify's expansion will continue in the foreseeable future, which should boost its stock long-term.

Should I invest in Shopify?

Given this likely growth, investors should seek to take a position in Shopify if they have available cash.

Admittedly, its 11 P/S ratio is still high, and the drop following the Q1 announcement indicated investors may have less tolerance for high sales multiples, and share prices may continue to fall in the near term. Thus, investors who buy should resist the urge to deploy all their cash at once and resolve to add shares slowly, perhaps using a dollar-cost averaging strategy.

However, recent disappointments do not negate the fact that Shopify is a leading e-commerce platform, and the industry CAGR and its market share indicate that growth should continue. With it still on the path to being a 100-year company, the SaaS stock should serve investors well over the next few years.

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Will Healy has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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