Shopify: Buy This Deep Pullback, Potential Double Digit Growth Ahead

seekingalpha05-25

SHOP has pulled back drastically since the recent earnings call, presenting a massive buying opportunity near to our previous recommended entry point of $65s.We believe that the market has over-...

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04:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4694932-shopify-stock-buy-this-deep-pullback-potential-double-digit-growth-ahead><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SHOP has pulled back drastically since the recent earnings call, presenting a massive buying opportunity near to our previous recommended entry point of $65s.We believe that the market has over-...</p>\n\n<a href=\"https://seekingalpha.com/article/4694932-shopify-stock-buy-this-deep-pullback-potential-double-digit-growth-ahead\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0097036916.USD","symbol_name":"贝莱德美国增长A2 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few years.Klaus Vedfelt We previously covered Shopify Inc. (NYSE:SHOP) in February 2024, discussing its excellent FQ4'23 earnings call while concluding that its profitable growth trend and growing leadership in the US e-commerce SaaS market might never come cheap after all. Combined with the management's promising Free Cash Flow guidance, we believed that the SaaS company had finally turned the corner, with minimal cash burn and a healthier balance sheet ahead. Since that Buy rating, SHOP has already pulled back by -26.7% - well underperforming the wider market at +6.2%, with the market overreacting to the FQ1'24 adj EPS miss/ supposedly softer FQ2'24 guidance and the stock consequently falling below our previous recommended entry point of $65s. Even so, we believe that the recent pullback is a gift indeed, with the stock appearing to be well-supported at $58s while matching the previous trading pattern since late October 2023. With SHOP still reporting robust monthly recurring revenue/ subscription growth, growing adjusted operating margins, and a healthy balance sheet, we believe that it remains a great Buy for opportunistic investors looking to buy this deep pullback. The SHOP Investment Thesis Looks Even More Compelling At This Deep Pullback For now, SHOP has reported a double beat FQ1'24 earnings call, with overall revenues of $1.86B (-13% QoQ/ +24% YoY) and adj EPS of $0.20 (-41.1% QoQ/ +1900% YoY). Much of its top-line tailwinds are attributed to the growing Gross Merchandise Volume [GMW] of $60.90B (-18.9% QoQ/ +22.7% YoY) and Gross Payment Volume [GPV] of $36.2B (-19.7% QoQ/ +31.6% YoY), as more merchants/ buyers increasingly adopt its payment platform at 60% (+2 points QoQ/ +4 point YoY). SHOP's price hikes have also worked as intended, with Subscription Solution revenues expanding to $511M (-2.6% QoQ/ +33.7% YoY) and Monthly Recurring Revenues to $151M (+1.3% QoQ/ +30.1% YoY) by the latest quarter. The increased penetration of Shopify Payments at 39% of the GPV (+6 points YoY) and growing GMWs have contributed to the growing Merchant Solutions revenues of $1.35B (-16.1% QoQ/ +20.5% YoY) and the higher Attach Rates of 3.06% (+0.21 points QoQ/ +0.02 YoY) as well. With SHOP intensifying their performance marketing efforts through advanced AI models, it has naturally reported \"significant improvements in both new merchant acquisition and customer acquisition\" by +180% and +60% between Q3'22 and Q1'24, respectively, while also driving down costs. As a result of these developments, it is unsurprising that the SaaS company has recorded expanding gross margins of 51.4% (+1.9 points QoQ/ +3.9 YoY). SHOP's bottom lines have also been boosted tremendously, as observed in the excellent FQ1'24 adj operating profits of $191M (-50.6% QoQ/ +429.3% YoY) after adjusting for non-cash stock-based compensation, implying expanding adj operating margins of 10.2% (-7.8 points QoQ/ +14 YoY/ +7.6 from FY2019 levels of 2.6%). This is on top of the increased Free Cash Flow generation of $232M (-47.9% QoQ/ +169.7% YoY) and margins of 12% (-9 points QoQ/ +6 YoY/ +11.1 from FY2019 levels of 0.9%), suggesting the SaaS company's ability to invest in its growth opportunities without depending on expensive debt and/ or dilutive capital raises. The same has been observed in SHOP's healthier net cash position of $4.26B (+4.1% QoQ/ +8.1% YoY) on the balance sheet, based on the increasing cash/ equivalents of $5.17B (+3.4% QoQ/ +6.5% YoY) and stable long-term debts of $916M (inline QoQ/ inline YoY) in the latest quarter. As a result, while the SaaS company's adj EPS generation may be lumpy, we are not overly concerned indeed. This is especially since most of the fluctuations are attributed to net unrealized (loss) gain on equity and other investments in public/ private companies at -$373M (+1.3% QoQ/ -273.4% YoY), with investors better off referring to its adj operating profits instead. At the same time, we believe that SHOP's FQ2'24 guidance with pro forma revenue growth in the low to mid-20s YoY and Free Cash Flow margins of ~12% remains excellent, despite the supposed miss from consensus estimates as a result of the logistics divestiture. This is especially true since \"the majority of the company's existing Plus merchants have chosen to commit to three-year contracts at existing 2023 rates,\" at notably raised subscription prices underscoring the stickiness of its SaaS offerings and its great position to continue reporting profitable growth ahead. The Consensus Forward Estimates Tikr Terminal At the same time, it made sense that the forward consensus estimates have been moderated as part of the divestiture of the logistics business, with SHOP expected to report a top/ bottom line growth at a CAGR of +21.2%/ +30.3% through FY2026. This is compared to the previous estimates of +19.9%/ +57% and historical top-line growth of +51.3% between FY2016 and FY2023, respectively. SHOP Valuations Tikr Terminal At the same time, it is also apparent that SHOP at FWD P/E valuations of 57.48x remains relatively expensive compared to other e-commerce stocks, such as Amazon.com, Inc. (AMZN) at 38.83x & MercadoLibre, Inc. (MELI) at 47.98x, and e-commerce SaaS peers, Wix.com Ltd. (WIX) at 27.87x & Squarespace, Inc. (SQSP) at 36.56x. This premium valuation has also triggered SHOP's painful corrections and downgrades as the market overreacts to the supposed FQ2'24 guidance miss, and it overlaps the painful YoY comparisons. However, due to its inherent leadership in the US Headless Commerce SaaS market with 20.37% in share as of May 16, 2024 (including Shopify Plus), up to $6.47T in Global E-Commerce market opportunities by 2029, and $24.31T in the Global Digital Payment Solutions market opportunities by 2030, we believe that SHOP continues to have a long runway for growth. This is significantly aided by the customer wins observed in the offline market, with more customers increasingly adopting its point-of-sale offerings, consequently triggering the SaaS company's +32% offline GMV growth YoY. Readers must not forget SHOP's immense opportunities internationally, since the segment only comprises \"30% of its revenue base\" in 2023, with the FQ1'24 international GMV growth of +38% YoY already outpacing the North America region. Market leaders never come cheap after all.  So, Is SHOP Stock A Buy, Sell, or Hold?  SHOP 4Y Stock Price TradingView For now, SHOP has already pulled back drastically by -24% since the recent earnings call, with it currently trading well below its 50/100/200-day moving averages. Despite the stock's deep pullback below our previous recommended entry point of $65s, we are seeing a natural support level at $58s - as seen from the chart above. Assuming that those levels hold, we may see SHOP generate an improved upside potential of +58% to our long-term price target of $92.50, based on the consensus FY2026 adj EPS estimates of $1.61 and the FWD P/E valuations of 57.48x.  As a result of the attractive risk/ reward ratio at current levels, we are maintaining our Buy rating here. Do not miss this dip.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2438098454"}