Shopify (NYSE: SHOP) witnessed a skyrocketing surge in its shares over the past year. However, the e-commerce stock rally came to an abrupt halt on Tuesday following its fourth-quarter earnings report.
Despite the software-as-a-service (SaaS) stock beating headline estimates, it took a 13% dive the day after the report, relinquishing some of its recent gains.
Impressive Financials Overshadowed
Shopify’s overall results portrayed resilience, indicating recovery from the e-commerce slump during the economic reopening post-pandemic. Revenue for the quarter soared 24% to $2.14 billion, or 30% when excluding the impact of the logistics business sale. Exceeding estimates set at $2.08 billion.
The growth was widespread, with gross merchandise volume (GMV) – the total value of goods sold on the platform – climbing 23% to $75.1 billion. Additionally, gross payments volume also surged 32% to $45.1 billion, contributing 60% of GMV in the quarter.
Notably, the company recorded a remarkable jump in free cash flow, spiking from $90 million in the year-ago period to $446 million. Shopify also reported a generally accepted accounting principles (GAAP) operating income of $289 million, translating into an operating margin of 13.5% – a substantial improvement in its seasonally strongest period. The figure signifies Shopify’s progress towards becoming a consistently profitable entity on an unadjusted basis, instilling investor confidence.
Furthermore, on an adjusted basis, earnings per share surged from $0.07 in the corresponding quarter last year to $0.34, comfortably surpassing estimates at $0.31.
Image source: Getty Images.
Market Response
Fourth-quarter results were robust; however, the stock is facing the same issue that hurt it during the bear market crash in 2022. Over the year preceding the latest earnings report, Shopify shares nearly doubled, leading to a price-to-sales ratio ballooning to over 16, prompting some investors to pause, given that it was below 10 just a year and a half ago.
Moreover, the company has reported just one annual GAAP operating profit, in 2021, when results were fueled by pandemic-induced online shopping. Hence, investors remain wary of its ability to deliver a profitable year in a normal environment.
Is Shopify a Buy?
The recent sell-off in Shopify shares seems tied to concerns about valuation and its first-quarter guidance, both of which do not reflect underlying fundamentals. The stock’s price-to-sales ratio now lies below 15, while the first-quarter guidance, a poor reason to sell the stock, is, in management’s words, attributed to increased spending on marketing and salaries to drive future revenue growth.
Despite the double-digit decline in the stock, the business’s health remains intact. Nevertheless, investors should anticipate more modest gains ahead. While Shopify still appears promising for long-term investors, expecting the kind of explosive gains seen over the last year might be unrealistic. With high expectations already priced in, the company has a lot to deliver.
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Jeremy Bowman has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
