Shopify Inc. (SHOP - Get Rating) provides a cloud-based, multi-channel commerce platform for small and medium-sized businesses. The company offers subscription solutions and merchant solutions. Merchants use the company’s software to run their business across their sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces.

SHOP failed to meet analysts’ revenue and earnings estimates in the last quarter. Its EPS and revenue missed the consensus estimates by 69.4% and 2.9%, respectively.

SHOP’s shares fell 16.7% in June due to the uncertain economic outlook. The highest increase in inflation since 1981 has led to subdued consumer spending and sagging consumer sentiment. The U.S. consumer confidence in June has dropped to its lowest in more than a year.

With inflation remaining at uncomfortably high levels, the Federal Reserve is trying to bring it under control by implementing aggressive interest rate hikes. Many analysts expect the central bank’s move to push the economy into a recession. And in a recessionary environment, consumers are expected to cut their discretionary expenditures, affecting SHOP’s sales.

SHOP’s stock has declined 74.3% in price year-to-date and 76.7% over the past year to close the last trading session at $35.33. The stock is currently trading 80% below its 52-week high of $176.29, which it hit on November 19, 2021.

Here’s what could influence SHOP’s performance in the upcoming months:

Mixed Financials

SHOP’s revenue increased 21.7% year-over-year to $1.20 billion for the first quarter ended March 31, 2022. The company’s gross profit increased 14.1% year-over-year to $637.63 million. However, its total operating expenses increased 67.2% year-over-year to $735.61 million.

Its net loss came in at $1.47 billion, compared to a net income of $1.25 billion in the year-ago period. Also, its loss per share came in at $11.70, compared to an EPS of $9.94 in the year-ago period.

Mixed Analyst Estimates

SHOP’s revenue for fiscal 2022 and 2023 is expected to increase 26% and 31.4% year-over-year to $5.81 billion and $7.64 billion, respectively. Its EPS for fiscal 2022 is expected to decline 85.5% year-over-year to $0.09. However, its EPS for fiscal 2023 is expected to increase 162.2% year-over-year to $0.24.

Lower-than-industry Profitability

SHOP’s 3.77% trailing-12-month net income margin is 20.9% lower than the 4.76% industry average. Likewise, its 1.90% trailing-12-month EBIT margin is 76.2% lower than the 8% industry average. Furthermore, the stock’s 0.43% trailing-12-month asset turnover ratio is 33.2% lower than the industry average of 0.64%.

Stretched Valuation

In terms of forward non-GAAP P/E, SHOP’s 356.30x is significantly higher than the 17.28x industry average. Likewise, its 7.92x forward non-GAAP PEG is 500.7% higher than the 1.32x industry average. And the stock’s 4.47x forward P/B is 18.9% higher than the 3.76x industry average.

POWR Ratings Reflect Bleak Prospects

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. SHOP has a D grade for Value, in sync with 366.58x forward EV/EBIT, which is significantly higher than the 14.56x industry average.

It has a D grade for Quality, consistent with its 1.27% trailing-12-month Capex/S, which is 46% lower than the industry average of 2.36%.

SHOP is ranked last out of 30 stocks in the F-rated Internet – Services industry. Click here to access SHOP’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

SHOP dropped 16.7% in June amid surging inflation and rising interest rates. Although the company’s revenue increased year-over-year, it missed analyst estimates in the last reported quarter.

With declining consumer spending and sagging consumer sentiment, SHOP’s revenue is expected to remain under pressure. Also, given its lower-than-industry profitability and stretched valuation, the stock could be best avoided now.

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

SHOP has an overall POWR Rating of F, equating to a Strong Sell. Therefore, one might want to consider investing in other Internet – Services stocks with a B (Buy) rating, such as Perion Network Ltd. (PERI - Get Rating), Liquidity Services, Inc. (LQDT - Get Rating), and Shutterstock, Inc. (SSTK - Get Rating).

SHOP shares fell $1.01 (-2.86%) in premarket trading Friday. Year-to-date, SHOP has declined -74.77%, versus a -17.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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