Elevator Pitch
I have a Buy investment rating for Shopify Inc. (NYSE:SHOP). I compared SHOP with Block, Inc. (SQ) inan earlier articlewritten on April 5, 2022, and I determined Shopify tobe the more attractive investment candidate of the two due to its "superior expected revenue and earnings growth rates." I have chosen to publish an update for Shopify as per the current article, in consideration of SHOP's recently announced stock split and Q1 2022 financial results.
Shopify's Q1 2022 results did not meet the market's expectations, and this has pushed SHOP's stock price lower which makes its valuations more attractive. In addition, the founder continues to be very involved in Shopify's business operations and the company has various initiatives in place to turbocharge its future growth. As such, I see Shopify as a good long-term investment deserving of a Buy rating, and see multiple reasons (as elaborated in the article) to buy its shares before the upcoming stock split in June.
SHOP Stock Key Metrics
SHOP's shares have done poorly, declining by -11% and -73% in the past month and the year-to-date period, respectively as per the charts below.
Historical One-Month Share Price Performance For Shopify
Seeking Alpha
2022 Year-to-date Stock Price Performance For SHOP
Seeking Alpha
It is easy to appreciate why Shopify's share price has underperformed if one reviews the company's key Q1 2022 metrics.
Firstly, SHOP's headline financial metrics disappointed investors. According to itsQ1 2022 earnings media releasepublished on May 5, 2022, prior to trading hours, Shopify's revenue expanded by +22% YoY to $1,204 million in the most recent quarter, but missed the sell-side's consensus top line projection by-3%. SHOP's non-GAAP adjusted earnings per share fell by -90% from $2.01 in Q1 2021 to $0.20 in Q1 2022. Furthermore, Shopify's Q1 2022 EPS came in -69% lower as compared to the Wall Street analysts' consensus estimate of$0.65per share.
Secondly, Shopify's performance by segment wasn't up to the mark as well. Based on consensus forecasts sourced fromS&P Capital IQ, SHOP's merchant solutions segment revenue of $859 million for Q1 2022 was -2% below the market's expectations of $880 million in sales for this business segment. Similarly, the actual +8% revenue growth for the company's subscriptions solutions business segment in the first quarter of this year was not as good as what the market had hoped for (+13%).
Thirdly, SHOP's key operating metric, Gross Merchandise Volume or GMV, for Q1 2022, also failed to impress the market. Although Shopify's GMV increased by +16% YoY to around $43 billion in the first quarter of the current year, investors had earlier anticipated a much higher +24% YoY growth in first quarter GMV to approximately $46 billion.
In a nutshell, Shopify's below-expectations GMV is a reflection of the normalization of e-commerce demand with the unwinding of WFH (Work-From-Home) tailwinds and reduced consumer spending in the current challenging economic environment. As such, it is natural that SHOP's shares have underperformed massively in 2022 thus far. In the subsequent section, I focus my attention on the stock split announcement for Shopify.
When Will Shopify Stock Split?
Prior to the company's Q1 2022 earnings release in early-May, Shopify announcedon April 11, 2022, that "its Board has approved a proposed 10-for-1 split of the Company's Class A and Class B shares."
In this announcement, it is highlighted that the stock split for Shopify will be effective "as of the close of business on June 22, 2022," assuming the relevant approvals are secured. Another important date to take note for SHOP investors isJune 7, 2022, when a meeting of shareholders is conducted to obtain approval for the proposed stock split.
In the next few sections of the article, I discuss the key reasons for investors to consider buying Shopify's shares prior to their upcoming stock split. In general, a stock split is marginally positive for most listed companies including Shopify, as stock trading liquidity tends to improve as the initial cost of becoming a shareholder is lower going forward. However, I think that there are other factors that are even more important in assessing Shopify's investment attractiveness, which I will elaborate on in the rest of the article.
Shopify's Q1 2022 Results Media Release
Another key strategic initiative for SHOP is POS Pro, which will help to drive omni-channel retailing for the company's merchants.
A Quick Snapshot Of POS Pro
Shopify's Product Website
Shopify disclosed at the company's recent quarterly investor call that it has added "thousands more POS Pro retail locations" in Q1 2022 and revealed that POS Pro is now available in "11 countries" globally. A December 3, 2021,McKinseyarticlenoted the firm's research found that "in most (product) categories, brick-and-mortar retailers typically achieve an organic traffic share nearly twice that of pure (online or e-commerce) players." As such, omni-channel retailing is a rising trend, and the expansion of Shopify's POS Pro will be a key factor determining how much SHOP can capitalize on the growth opportunities in this area.
The final factor that influences the buy decision for Shopify's shares is its valuations, which I delve into in the next section.
Reasonable Valuations
SHOP's share price has dropped by-73%and-70%in the 2022 year-to-date and one-year time periods, respectively. As a result, Shopify's valuations have become comparatively more reasonable as compared to what they were in the past.
According to valuation data sourced fromS&P Capital IQ, the market valued Shopify at 2,859 times consensus forward next twelve months' EV/EBITDA and 53 times consensus forward next twelve months' Enterprise Value-to-Revenue in early-May 2020 at the peak of the pandemic.
Based on its last done share price of $369.04 as of May 27, 2022, SHOP is now valued by the market at a consensus forward fiscal 2024 Enterprise Value-to-Revenue multiple of 3.9 times and a consensus forward FY 2024 EV/EBITDA multiple of 31.0 times. Shopify's current valuations are much more palatable following the substantial price correction.
What Is Shopify's Outlook After The Stock Split?
Shopify's outlook after the stock split (June 2022) can be described as "short-term pain, long-term gain."
The company guided in its Q1 2022 results press release that "year-over-year revenue growth to be lower in the first half and highest in the fourth quarter of 2022", but cautioned that it will "reinvest all of our gross profit dollars back into the business to pursue our multiple paths to growth." SHOP's management guidance is very much aligned with the sell-side analysts' consensus expectations.
Based onS&P Capital IQdata, the consensus sell-side financial projections point to SHOP's YoY revenue growth accelerating from +21.7% in Q1 2022 and +20.1% in Q2 2022 to +27.9% and +31.7% for Q3 2022 and Q4 2022, respectively. Over the intermediate term, Wall Street analysts expect Shopify's top line expansion to accelerate from +26.2% in fiscal 2022 to +43.8% in fiscal 2024, while expanding its EBIT margin from 1.3% to 6.0% during this same period. I view these financial forecasts as reasonable, as Shopify's current strategic initiatives should pay off in terms of faster revenue growth over time, and its profitability should also improve with economies of scale and a gradual slowdown in the pace of investments.
Is SHOP Stock A Buy, Sell, Or Hold?
SHOP stock is a Buy. Reasonably attractive valuations, the founder-CEO factor, and the willingness to invest for the long-term are what attracts me to Shopify's shares.
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