On Feb. 16, Shopify topped earnings and revenue estimates for the December quarter, which included a record $6.3 billion in global Black Friday-Cyber Monday sales.
In the current quarter, Shopify has launched a sales channel on Chinese online giant JD.com‘s (JD) Marketplace platform for third-party sellers. The new channel will give Shopify merchants access to JD.com’s 550 million active customers in the world’s largest e-commerce market, Shopify said in an earnings release.
What Is Shopify And How Does It Work?
Shopify was started by snowboarding enthusiasts more than a decade ago. In fact, it started as an online snowboard shop, moving into e-commerce software when the founders couldn’t find what they were looking for — a platform to both sell goods and grow their brand.
Across 175 countries, 1.75 million merchants use the SHOP platform to sell and market their products. In return, the software company earns subscription fees. Subscriptions range from $29 per month for entrepreneurs to $2,000 and up for large companies. It also offers shipping, digital payments and fulfillment, under the umbrella terms of merchant solutions.
SHOP Earnings And Fundamentals
For the December quarter of 2021, Shopify earnings fell 14% year over year despite a 41% sales gain. Looking ahead, SHOP continued to warn of slower growth, as well as higher spending and investments. Both merchants and consumers pivoted online during the pandemic, giving Shopify earnings a huge boost in 2020.
For the Black Friday-to-Cyber Monday period, the year’s biggest shopping event, Shopify’s global sales hit $6.3 billion, up from $5.1 billion in 2020. Gross merchandise volume on the Shopify platform rose 31% to $54.1 billion, beating estimates.
In 2022, Wall Street expects Shopify earnings per share to fall 49% while sales increase 32%. They expect SHOP earnings to rebound 57% to $5.14 a share in 2023, but that would still be below 2021 EPS of $6.41.
Shopify’s outlook for 2022 assumes a “more measured macro environment” vs. 2021. The company’s also cautious “around inflation and consumer spend near term,” with the pandemic boost to e-commerce seen easing. Management said it expects revenue growth to be lower in Q1 2022 and highest in Q4 2022, but did not offer specific financial guidance.
On key earnings and sales metrics, Shopify stock earns an EPS Rating of 68, and an SMR Rating of B, on a scale of A-E, with A the best. The EPS rating compares a company’s earnings growth to other companies, and its SMR Rating measures sales growth, profit margins and return on equity.
Throughout most of the coronavirus pandemic, Shopify grew quarterly earnings and sales double and triple digits. Investors should generally look for stocks with sustained earnings and sales growth of at least 25%. So SHOP stock is far ahead on both counts.
Out of 36 analysts on Wall Street, 16 rate SHOP a buy, 19 have a hold and one has a sell, FactSet says.
Shopify Stock Technical Analysis
On Feb. 17, shares of SHOP dived nearly 12% to a new low, near 660. They have more than halved from the Nov. 19 all-time high. Shopify stock flagged a series of sell signals before crashing in 2022. The first clear signal came in late November, when it fell 8% below its 1,650.10 buy point. It went on to undercut its 10-week and 40-week moving averages, where it remains. Shopify has a lot of repair work to do.
The IBD MarketSmith chart shows the stock’s relative strength line has plunged alongside SHOP stock’s dive. The RS line rallied sharply for much of 2019 and 2020. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.
A stock’s RS Rating is different than the relative strength line, although Shopify is doing poorly according to both metrics right now. Shopify’s RS Rating of 9 rating means its performance is in the bottom 9% of all stocks in IBD’s database over the past year.
The Accumulation/Distribution Rating of E reflects considerable selling by institutions over the past 13 weeks. As of December, 2,182 funds owned Shopify stock. And SHOP shows eight quarters of rising fund ownership, according to the IBD Stock Checkup tool.
Coronavirus Winner, Fulfillment Network
In 2020, Shopify emerged as a clear coronavirus stock winner. The pandemic drove up online buying and selling, with more consumers and merchants turning to the Shopify platform.
The Canadian company surpassed $500 million in quarterly revenue for the first time in the June 2020 quarter. In the June 2021 quarter, it topped $1 billion in quarterly revenue for the first time.
Analysts call SHOP a structural winner from the pandemic boost to e-commerce. Goldman Sachs forecasts that global e-commerce will grow 19% annually over the next three years, up from a prior view of 16%.
Meanwhile, Shopify is investing heavily to grow. A key area of investment is the Shopify Fulfillment Network. Other areas of investment include the Shopify app and international expansion.
Shopify expects capital expenditures for the fulfillment network to ramp in 2022. It’s targeting $1 billion in capex in 2023 and 2024, specifically for key U.S. warehouse hubs, Stifel analyst Scott Devitt says.
Devitt expects “larger, more controlled facilities,” which could lead to better quality control and eventual cost savings. But there’s also worry that big investments in Shopify’s fulfillment network could mean moving from an asset-light model to owning distribution centers.
Google, Facebook Partnerships
Shopify is leveraging partnerships to grow, including the newest one with China’s JD.com. In 2021, Shopify and TikTok teamed up to allow shoppers to shop directly in TikTok’s viral video-sharing app for the first time. Other partners include Alibaba (BABA), Walmart (WMT), Facebook (FB), Pinterest (PINS) and Google, a unit of Alphabet (GOOGL).
Analysts at KeyBanc Capital Markets believe that Shopify could eventually levy an e-commerce fee from merchants, similar to Amazon.
However, more and more companies seek to provide e-commerce software services. Adobe acquired e-commerce technology firm Magento in 2018. Microsoft launched Dynamics 365 in 2019. Partners Facebook and Google introduced shopping tools in 2020.
In February, Amazon acquired Selz, a Shopify rival that helps small businesses to build online stores.
SHOP Stock Group
Shopify belongs to IBD’s Computer Software-Enterprise group, which ranks a poor No. 185 out of 197 industry groups. Earlier on during the coronavirus pandemic, enterprise software stocks emerged as winners because of remote working and learning.
Others, including ServiceNow, can often be found in IBD Leaderboard, a curated list of stocks with the most potential for big gains.
Is Shopify Stock A Buy Right Now?
Shopify ticks off many of the boxes that investors should be looking for. It was a big winner in 2019 and 2020, solidifying its threat to eBay and Amazon. Key acquisitions and expansions promise more runway for growth. New and expanded partnerships with JD.com, TikTok, Google, Facebook and Alibaba could move the needle.
The software company has a history of huge earnings and sales growth. But profits fell in its latest two quarters and are likely to remain weak for the next four, as the torrid pace of sales slows.
And SHOP belongs to a lagging industry group.
Bottom line: Shopify stock is not a buy right now.
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