To The Moon

A U.S. stock rally fueled by Donald Trump’s election victory is stumbling, as investors contend with everything from renewed inflation worries to uncertainty over the impact of the president-elect's policies.

The $.SPX(.SPX)$ fell 2% in the past week, erasing more than half its gains from a post-election surge fueled in part by optimism over the pro-growth policies that are a key part of Trump’s economic platform.

The best-performing concepts is Internet Services & Infrastructure.

Considering the different perceptions of the stock, this time TigerPicks chose $Shopify(SHOP)$ to have a fundamental highlight to help users understand it better.

$Shopify(SHOP)$

Founded in 2004, Canada-based Shopify, Inc. operates a cloud-based commerce platform designed for small and medium-sized businesses. Its software is used by merchants to run business across all sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops.

Shopify reported better than expected third fiscal quarter results on Tuesday that showed that the e-Commerce company continues to execute well in its core market for online stores. Shopify beat top line estimates and submitted a strong outlook for Q4'24, in part due to high expectations for the upcoming holiday season.

Shopify benefited from strong revenue momentum, across both of its core segments, and the company saw a 5 PP revenue acceleration in the last quarter as well. Given the long-term opportunity in the e-Commerce market, I believe Shopify is an attractive segment play, but I am down-grading shares to hold nonetheless due to the large increase in valuation post-earnings!

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Shopify beats earnings estimates

Shopify reported a strong earnings beat for the third quarter due to strong growth in the company’s e-Commerce segments: it reported GAAP earnings of $0.64 per share which beat the consensus by $0.46 per-share, and revenues also came in higher than expected. Revenues were reported at $2.16B, beating the consensus estimate by $47.2M.

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Shopify generated $2.16B in revenues in the third-quarter which calculates to a year-over-year growth rate of 26%. In the previous quarter, Shopify generated 21% top line growth, meaning the e-Commerce company saw a solid 5 PP revenue acceleration in Q3'24.

Gross merchandise volume, a key metric for e-Commerce companies that expresses how quickly a platform is growing overall, hit $69.7B, showing 24% year-over-year growth and a 2 PP GMV growth acceleration compared to Q2'24. Both of Shopify’s core segments, Subscription Solutions and Merchant Solutions, benefited from this growth: Subscriptions and Merchant Solutions saw 26% year-over-year top line growth, driven by higher gross merchandise value as well as a higher merchant customer base which is in part growing due to Shopify's AI tools. The AI tools help merchants improve productivity and make workflows like writing product descriptions or conducting customer service easier.

Shopify

As a result of this top line momentum, the e-Commerce company is seeing significant growth in its gross profits, which is another key metric for e-Commerce platforms as well. In the third quarter, Shopify generated $1.12B in gross profits, showing 24% growth year-over-year.

In terms of free cash flow, Shopify is doing much better, however. The e-Commerce company generated $421M in free cash flow in the September quarter on $2.16B in revenue… which calculates to a free cash flow margin of 19%. The free cash flow margin expanded 3 PP compared to the year-earlier period and, importantly, Shopify's free cash flow is growing about twice as fast as its top line, indicating positive operating leverage.

Outlook for Q4’24

Shopify’s outlook for the fourth fiscal quarter was strong: the e-Commerce company expects to generate mid to high twenties top line growth, on a year-over-year basis, which beat the expectation of a 23% growth rate. The positive outlook is due to Shopify expecting a robust holiday period as well as continual merchant gains driven by the company's AI product suite. Chiefly because of Shopify's very positive outlook for Q4 revenue growth, shares of Shopify popped 21% after Q3 earnings.

Shopify is now likely fairly valued

Shopify is currently priced at a price-to-earnings ratio of 73.6X which is significantly higher than the average P/E ratio of 55X in the last year. However, SaaS companies with considerable platform scale tend to be valued highly and Shopify is widely expected to deliver consistent 20%+ annual top line growth in the next three years (according to SA-provided consensus estimates).

$Amazon.com(AMZN)$ which is also running a large-scale e-Commerce platform is trading for a forward price-to-earnings ratio of 34.4X and is therefore significantly cheaper than Shopify. I currently have a strong buy rating on Amazon chiefly because the company owns other businesses as well, including its super-profitable and rapidly-growing Cloud segment, known as Amazon Web Services. I believe Amazon has considerable growth potential long term and the company's much lower P/E ratio makes shares especially attractive: Road To $325.

In my previous work on Shopify, I stated that I saw a fair value of ~$100 per share for the e-Commerce company. Since my fair value estimate has now been reached -- shares of Shopify are trading at $109 -- I believe the risk profile is no longer as attractive as it was earlier this year. For this reason, I am down-grading shares of Shopify to hold and would consider buying shares again below a price of $100.

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Risks with Shopify

The biggest risk for Shopify, in my opinion, is a slowdown in the Merchant Solutions segment which is the largest business in the e-Commerce company’s portfolio. Shopify is obviously benefiting from strong growth in the e-Commerce business and the holiday season tends to be a good one for Shopify as well. However, what would change my mind about Shopify is if the firm were to see decelerating top line growth, especially in Merchant Solutions, or a decline in its free cash flow margins.

Final thoughts

Shopify submitted a strong earnings release for the third fiscal quarter on Tuesday that included a 5 PP Q/Q revenue acceleration in Q3'24 as well as a strong revenue outlook for the fourth quarter. Gross merchandise volume, revenues, and gross profits are all growing at double-digits.

The real story, however, is that Shopify's free cash flows are growing twice as fast as its top line and the e-Commerce company is seeing solid FCF margin gains here as well. As much as I like Shopify for its growth in key metrics, the platform's shares are now likely more than fairly valued and I see an unattractive risk profile for investors.

Given the stability of Shopify's third-quarter earnings figures, broad strength in the company's forward guidance, and the rapidly building price momentum that is currently building on the long-term price charts, I will maintain my long position on this stock and raise my outlook to a "strong buy."

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 18 Wall Street analysts offering 12 month price targets for Shopify in the last 3 months. The average price target is $85.31 with a high forecast of $103.00 and a low forecast of $67.00. The average price target represents a -21.37% change from the last price of $108.49.

Resource:

https://seekingalpha.com/article/4737973-shopify-likely-fairly-valued-rating-downgrade

https://seekingalpha.com/article/4737828-shopify-stock-continues-surging-higher-technical-analysis-rating-upgrade

What are your thoughts on $Shopify(SHOP)$ ?