Will the Holiday Season Send This Stock Higher?

The holiday season is around the corner. 

Online retailers rely on it for a bulk of their profits, some even as much as 90% of their total annual sales. 

And our proprietary Trackstar sentiment indicator picked up on a flurry of activity among online-retailer stocks as we head into Thanksgiving.

Shopify (SHOP) stood out for its search volume, which outpaced companies like PayPal, Ford, and Bank of America. 

Once trading near $200, shares took a 60%+ haircut and now trade near $40.

Shopify’s Business

Shopify offers an all-in-one commerce platform for businesses. It’s great for merchants of any size, giving them a one-stop shop to create an online presence.

Millions of merchants in over 175 countries utilize the platform. Shopify has helped businesses support over 5 million jobs in 2021 and generate over $444 billion in global economic activity. 

Even massive companies like Tesla, PepsiCo, and Kraft Heinz use the platform for business.  

Shopify breaks its revenues into the following categories: subscription solutions and merchant solutions. 

Source: SHOP’s SEC filing

Key metrics analysts track for SHOP include monthly recurring revenue and gross merchandise volume.

It’s also worth noting that Shopify is based in Canada.

Financials

Source: Stock Analysis

SHOP saw explosive growth over the last six years as e-commerce grew and then COVID sent it into overdrive. 

The company’s revenues went from $389 million in 2016 to $4.6 billion in 2021. Over the last 12 months, the firm has generated $5.2 billion from sales. 

The firm has yet to reach profitability but has been cash-flow positive from operations prior to the recent 12-month period. 

And it has no near-term financial concerns. For example, it has $4.9 billion in cash and $1.3 billion in total debt. Its current ratio of 6.6x is stellar. 

Valuation

Source: Seeking Alpha

Because SHOP has yet to reach profitability, it doesn’t have a P/E GAAP ratio. While that’s disappointing, the same applies to many of its competitors. 

For example, Etsy (ETSY), Coupang (CPNG), and eBay (EBAY) don’t have P/E GAAP ratios. 

In our Trackstar top five, only Amazon (AMZN) does at 88.2x. But e-commerce isn’t the only source of revenue for AMZN. Its AWS cloud computing business helps it reach profitability. 

SHOP trades at an extremely high price-to-sales ratio of 9.2x, compared to ETSY at 6.1x, AMZN at 2x, EBAY at 2.6x, and CPNG at 1.5x. 

Profitability

Source: Seeking Alpha

SHOP has a net income margin of -61%, showing how far away it is from profitability. 

Even EBAY at 0.28%, CPNG at -2.9%, and ETSY at -25.9% are doing better than SHOP. 

Shopify’s EBIT margin of -7.5% trails its rivals substantially. ETSY is at 15.8%, AMZN at 2.5%, EBAY at 25%, and CPNG at -2.9%. 

Investors have fallen in love with cash-flow-positive companies in 2022. Unfortunately, SHOP doesn’t generate cash from its operations. This year, it’s lost -$131.3 million, while ETSY has made $682.3 million, AMZN has made $39.6 billion, EBAY has made $1.8 billion, and CPNG has lost -$217.7 million. 

SHOP did generate cash from operations until March of this past year, when SG&A costs increased from around 25% to 35% of revenues.

Growth

Source: Seeking Alpha

Investors are betting that SHOP can grow into its valuation. And despite weakness in the overall economy, the firm continues to grow rapidly. 

In Q3 2022, its merchant solutions revenue grew by 26%, subscription solution revenue by 12%, and gross merchandise volume by 11%. 

Revenue grew 24.5% over the last year. None of its competitors come close to it. ETSY has grown revenues by 11%, AMZN by 9.6%, and CPNG by 18.6%. EBAY has lost -3.7%. 

Our Opinion 3/10

Shopify is a great company, but it’s not a great stock. 

Even with shares down more than 60% YTD, they’re grossly overvalued. 

To drive home the point, the company shows a forward P/E ratio of 1,010x and has a history of losses. 

We’d rather wait for the company’s financials to improve or for it to dip into the teens before we buy.

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