Shopify Inc. (SHOP) will unveil its first-quarter results on May 8. Wall Street anticipates the cloud-based commerce company to report higher revenues and a robust year-over-year increase in earnings. In this piece, we examine the company’s fundamentals to see whether the stock could be a solid buy prior to its earnings, whether investors should wait for a better entry point, or avoid the stock now.

For the first quarter, SHOP’s revenue is projected to rise 22.5% year-over-year to $1.85 billion. Its earnings per share estimate of $0.17 for the about-to-be-reported quarter represents a significant increase from the prior-year period. The company has a robust earnings track record, surpassing the consensus estimate in each of the past four quarters.

SHOP also reported a record free cash flow of $9.5 billion, achieving a 13% margin in fiscal 2023. The company expects its first-quarter revenue growth in the low twenties year-over-year. After adjusting for a 500-600 basis points headwind due to the divestiture of the logistics business, revenues are projected to grow in the mid to high twenties year-over-year. Additionally, the gross margin is anticipated to increase by approximately 150 basis points sequentially.

SHOP’s shares have gained 24.4% over the past six months and 65.3% over the past year, closing the last trading session at $74.46.

Here’s what you might want to consider ahead of its upcoming earnings release:

Robust Financials

SHOP’s total revenue for the fiscal fourth quarter, which ended December 31, 2023, increased 23.6% year-over-year to $2.14 billion. Its adjusted gross profit grew 30.1% over the prior-year quarter to $1.07 billion. The company’s income from operations amounted to $289 million, compared to a loss of $188 million in the previous year’s quarter.

In addition, its adjusted net income came in at $441 million or $0.34 per share, representing a substantial increase from the same period last year. Also, its free cash flow stood at $446 million, up by a robust 395.5% year-over-year.

Favorable Annual Analyst Estimates

Analysts expect SHOP’s fiscal 2024 EPS and revenue to increase 40.9% and 21.4% year-over-year to $1.03 and $8.57 billion, respectively. Its fiscal 2025 EPS and revenue are expected to register an impressive year-over-year growth of 32.2% and 20.2%, reaching $1.36 and $10.30 billion, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, SHOP is trading at 72.41x, 212% higher than the industry average of 23.21x. Likewise, its forward EV/Sales and EV/EBITDA of 10.74x and 71.02x are 290.3% and 386.7% higher than the industry averages of 2.75x and 14.59x, respectively. Also, its 11.19x forward Price/Sales is 306.2% higher than the 2.76x industry average.

Mixed Profitability

In terms of the trailing-12-month gross profit margin, SHOP’s 49.79% is 2.4% higher than the 48.62% industry average. Its trailing-12-month asset turnover ratio of 0.64x is 6.2% more than the industry average of 0.60x.

On the other hand, SHOP’s trailing-12-month net income margin of 1.87% is 19.9% lower compared to the 2.34% industry average. Likewise, its 1.53% trailing-12-month Return on Common Equity is 49.7% lower than the 3.03% industry average. Furthermore, the stock’s 4.67% trailing-12-month EBITDA margin compares to the industry average of 9.53%.

POWR Ratings Reflect Uncertainty

It’s no surprise that SHOP has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories.

SHOP’s stock is trading below its 50-day moving average of $74.71 but above its 200-day moving average of $68.41, justifying its C grade for Momentum.

SHOP is ranked #19 out of 27 stocks in the Internet – Services industry. Click here to access SHOP’s Growth, Value, Stability, and Sentiment ratings.

Bottom Line

Thanks to profuse investment in developing cutting-edge solutions for modern e-commerce, Shopify has significantly enhanced its product offerings. Moreover, the integration of AI through Shopify Magic across various products and workflows has further empowered merchants to broaden their reach and impact. Recently, the company rolled out new features to Shopify Magic, including a Media Editor capable of professional image edits with just a few clicks or keyword prompts.

Building upon these advancements, Shopify delivered a strong performance in fiscal year 2023. SHOP’s balance sheet is stellar, and it appears to be a compelling earnings-beat candidate. However, investors should also pay attention to other factors, such as its expensive valuation, mixed profitability, and momentum.

As Shopify prepares for its earnings release, it may be prudent for investors to adopt a cautious approach and wait for a better entry point.

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

SHOP has an overall POWR Rating of C, equating to a Neutral rating. You may check out these A (Strong Buy) or B (Buy)-rated stocks within the Internet – Services industry: Similarweb Ltd. (SMWB), Liquidity Services, Inc. (LQDT), and Wix.com Ltd. (WIX). For exploring more Internet – Services stocks, click here.

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SHOP shares were trading at $76.62 per share on Monday afternoon, up $2.16 (+2.90%). Year-to-date, SHOP has declined -1.64%, versus a 8.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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