Headquartered in Ottawa, Canada, e-commerce company Shopify Inc. (SHOP) provides a commerce platform and services in Canada, the United States, Europe, the Middle East, Africa, the Asia Pacific, and Latin America. The company’s platform enables merchants to display, manage, market, and sell their products through various sales channels.

On July 15, 2022, SHOP launched its new Shopify POS and integrated hardware, Wisepad 3, for merchants in Singapore. Bharati Balakrishnan, SHOP’s Regional Head, SEA, said, “Shopify POS will help Singaporean merchants manage this multitude of channels by unifying their online and offline sales.”

Moreover, on July 8, 2022, SHOP completed its acquisition of Deliverr, Inc. With this acquisition, SHOP aims to fortify its logistic services with the help of an expanded and highly potent workforce.

However, on July 26, 2022, SHOP announced its plan to lay off around 1,000 workers, or around 10% of its global workforce. CEO Tobi Lutke made this announcement anticipating a pullback in e-commerce spending in the near term.

Over the past month, SHOP has gained 30.6% to close the last trading session at $41.02. However, it has lost 70.2% year-to-date and 73.6% over the past year.

Here is what could shape SHOP’s performance in the near term:

Mixed Financials

For the second quarter ended June 30, 2022, SHOP’s revenues came in at $1.30 billion, up 15.7% year-over-year. However, its loss from operations came in at $190.21 million, compared to income from operations of $139.44 million in the prior-year period.

Moreover, its adjusted net loss came in at $38.45 million, compared to an income of $284.61 million in the previous period. Also, its adjusted loss per share came in at $0.03, compared to an EPS of $0.22 in the year-ago period.

Stretched Valuations

In terms of its forward EV/S, SHOP’s 8.42x is 185.6% higher than the industry average of 2.95x. Its forward P/S of 9.47x is 215% higher than the industry average of 3.01x. Furthermore, its forward Price/Book of 6.46x is significantly higher than the industry average of 4.36x.

Poor Profit Margins

SHOP’s trailing-12-month negative EBITDA margin of 2.92% is lower than the industry average of 12.83%. Furthermore, its trailing-12-month net income margin of negative 38.01% is lower than the industry average of 4.21%.

Moreover, SHOP’s trailing-12-month ROCE, ROTC, and ROTA of negative 20.18%, 1.26%, and 17.69%, compare with the industry averages of 6.88%, 4.16%, and 2.75%, respectively.

POWR Ratings Reflect Bleak Prospects

SHOP has an overall rating of F, equating to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

SHOP has a D grade for Value and Quality, consistent with its higher-than-industry valuation multiples and lower-than-industry profit margins, respectively. In addition, it has a D grade for Stability, in sync with its beta of 1.80.

In the 30-stock Internet – Services industry, SHOP is ranked last. The industry is rated F.

Click here for the additional POWR Ratings for SHOP (Growth, Momentum, and Sentiment).

View all the top stocks in the Internet – Services industry here.

Bottom Line

Although the company’s recent developments should be beneficial, declining e-commerce spending could limit its growth. Moreover, according to the U.S. Census data, e-commerce held 14.3% of total retail sales in the first quarter of 2022, compared to 14.9% in the year-ago period.

And considering its stretched valuations and poor profit margins, I think SHOP could be best avoided now.

How Does Shopify Inc. (SHOP) Stack Up Against its Peers?

While SHOP has an overall POWR Rating of F, one might consider looking at its industry peers, Perion Network Ltd. (PERI), Liquidity Services, Inc. (LQDT), and Shutterstock, Inc. (SSTK), which have an overall B (Buy) rating.

SHOP shares were trading at $41.43 per share on Friday afternoon, up $0.41 (+1.00%). Year-to-date, SHOP has declined -69.92%, versus a -12.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

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