Although Canada-based e-commerce company Shopify Inc.’s (SHOP) latest earnings show an improvement in its top line, softened demand could weigh heavily on its bottom line, as reflected in its soft guidance. Moreover, given the ever-present risk of technological disruption in an intensely competitive industry, it could be wise to avoid this stock for now.

SHOP offers subscription solutions and merchant solutions. Its platform includes a mobile-optimized checkout system to enable merchants’ consumers to buy products over mobile websites.

Despite gaining 8.1% over the past month and 31.9% year-to-date, the stock is down 34.9% over the past year. It closed the last trading session at $45.79.

Let’s closely examine the fundamentals of SHOP.

Weakening Bottom Line

For the fiscal fourth quarter (ended December 31, 2022), SHOP’s revenue and adjusted gross profit increased 25.7% and 16.9% year-over-year to $1.74 billion and $818.84 billion, respectively. However, the company’s adjusted operating income and adjusted net income declined 53.1% and 47.4% year-over-year to $60.99 million and $91 million, respectively.

As a result, SHOP adjusted quarterly net income attributable to shareholders halved to $0.07 per share.

For the fiscal year that ended December 31, 2022, SHOP’s revenue and adjusted gross profit increased 21.4% and 12.1% year-over-year to $5.60 billion and $2.81 billion, respectively. However, the company’s adjusted operating income and adjusted net income came in at $6.06 million and $47.59 million, compared to $717.99 million and $814.39 million, respectively, in the previous fiscal year.

As a result, SHOP adjusted net income for the fiscal year attributable to shareholders came in at $0.04 per share, compared to $0.64 in the previous fiscal year.

Stretched Valuation

Given the recent uptrend, SHOP is trading at a premium compared to its peers. Its forward P/E multiple of 1518.41 and forward EV/EBITDA multiples of 4116.43 are exorbitant compared to the respective industry averages of 20.32 and 13.39.

Similarly, SHOP’s forward EV/Sales, Price/Sales, and Price/Book multiples of 9.03, 9.59, and 7.15 compare unfavorably to the industry averages of 2.70, 2.65, and 3.64, respectively.

POWR Ratings Reflect Fundamental Weakness

SHOP’s overall D rating translates to a Sell in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SHOP has a D grade for Stability, as reflected in its beta of 2.04 and a high spread between its 52-week high and 52-week low prices of $75.88 and $23.63, respectively.

In addition, SHOP has a D grade for Value and Momentum, consistent with its stretched valuations despite the long-term downtrend in price action.

Unsurprisingly, SHOP is ranked #25 of 28 stocks in the Internet – Services industry.

Click here to see additional POWR Ratings for Growth, Sentiment, and Quality for SHOP.

Bottom Line

For the first quarter of fiscal 2023, SHOP has forecasted its revenue growth to be in the high-teens percentage on a year-over-year basis.

With inflation and rising interest rates expected to keep weighing on consumer spending, SHOP is expected to incur a loss of $0.04 per share in the first quarter, compared to an EPS of $0.02 in the year-ago quarter. The company’s EPS for the fiscal year is expected to decrease 26% year-over-year to $0.03.

While its current outlook stands out in stark contrast to its pandemic boom, SHOP’s core activities in a softening market have been facing unrelenting pressure from competition on both livestream shopping and logistics fronts, the latter of which is being countered through the acquisition of Deliverr and partnership with Flexport.

Hence, given SHOP’s uphill task amid macroeconomic headwinds, it could be wise to steer clear of this overvalued and volatile stock for now.

Stocks to consider instead of Shopify Inc. (SHOP)

Unfortunately, the odds of SHOP outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these 3 B-rated (Buy) stocks from the Internet – Services industry instead:

Shutterstock, Inc. (SSTK)

Perion Network Ltd. (PERI)

Liquidity Services, Inc. (LQDT)

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SHOP shares were trading at $44.88 per share on Friday morning, down $0.91 (-1.99%). Year-to-date, SHOP has gained 29.30%, versus a 2.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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