Will Shopify Stock Bounce?

Shopify Inc. (NYSE:SHOP) has come a long way since its 2006 beginnings and now enjoys over 10% share of the worldwide e-commerce platform market and 29% in the United States alone.

As an e-commerce leader, it has figured out how to both market masterfully and provide fulfillment services to customers.

Being the powerhouse behind so many businesses, Shopify has been acutely focused on expanding fulfillment management services and strengthening sales channels so that purchasing via online stores is seamless for end customers. And that focus has been rewarded by investors.

Since its public market debut in 2015, Shopify’s roaring successes have translated to a premium valuation. But now with the stock is down by more than 14% over the past three months and about 7% over the past month alone, is it now time to buy the dip?

Why is Shopify Stock on a Downtrend?

Shopify’s outlook for the current quarter was the primary reason for investors to take profits as speculation was rife that a slowdown was imminent.

However, the results weren’t all that bad when viewed in their totality. The company impressed analysts and investors by the increases in revenue of 24% from a year ago to $2.1 billion. Merchant Solutions revenue rose by 21% to $1.6 billion. Much of the improvement was driven by the growth of GMV, which was up 23% over the comparable period.

Shopify’s operating margin came in at 13%, and free cash flow margin was reported to be 21%. Healthy gross margin of 49.5% wowed some investors, particularly when compared to the 46% figure in the prior-year quarter.

On the bottom line, net income came in at $657 million versus a $623 million loss in the same period the previous year. EPS of $0.34, versus $0.07 a year ago, topped the consensus estimate by 13.1%.

The company’s performance for the full year 2023 also showed strength. Revenue grew by 26% compared to 2022, while free cash flow soared to $905 million from negative $186 million in the year prior.

While everything looked rosy, what worried investors was the company’s first-quarter outlook, which indicated higher operating expenses that might impact profits. Shopify expects operating expenses to increase by a “low-teens percentage rate” compared to the prior quarter. Investors reacted to this primarily because the company had earlier been on a cost-cutting spree.

Wedbush analysts stated that on the basis of the guidance, operating income for the first quarter might come in well below the consensus estimate.

Moreover, management expects free cash flow margin in the high single digits, which is lower than the figure reported in the prior quarter. It expects to register revenue growth percentage at the low twenties over the prior-year period.

Will Shopify’s AI Focus Show Results?

AI is taking almost every industry by storm as companies try to incorporate new AI capabilities, and e-commerce is no exception.

Artificial intelligence is becoming an integral part of the commerce business too, as companies try to provide tailored and more personalized experiences to customers. It is also creating opportunities for an enhanced understanding of customer choices that help to automate critical processes.

A McKinsey report suggests personalization can raise revenue and retention potential by up to 15% and can lead cost savings of up to 30%.

The global artificial intelligence in e-commerce market is expected to grow by a CAGR of 14.6%, reaching about $22.6 billion by 2032.

Shopify is leveraging AI to bolster its business dynamics. The company’s popular ‘Shopify Magic’ provides a range of AI-supported features throughout its workflow that can ease out tasks like marketing, store building, and so on.

In addition, the chatbot called Sidekick is evidence of Shopify’s generative AI efforts. By consistently leveraging AI, Shopify should undoubtedly improve the experiences for merchants and shoppers and help it grow.

Is Shopify Overvalued?

Shopify is currently valued at a forward non-GAAP price-to-earnings multiple of 69.7x and a forward price-to-sales of 10.78x. Relative to the industry average, such numbers look quite pricey indeed.

However, Shopify has posted strong growth in the e-commerce space. The company seems poised to carry on expanding its business until it actually justifies the premium prices investors are paying.

Today’s elevated valuation makes it awfully vulnerable to big drops if there are any adverse economic turns or if investors’ expectations regarding its fundamental growth are not met. This was starkly evident after the company reported its Q4 results. It seems that shareholders will need Shopify to display consistent growth in order to fully digest its valuation.

Will Shopify Stock Bounce?

Analysts’ forecast that Shopify will bounce by as much as 15% to its average price target of $82.71 per share. Though the stock might rebound, the path to higher price is likely to be somewhat volatile as investors reassess whether the company can keep doing well in the future on both the top line and bottom.

The anticipated uncertainties are apparent in analysts’ recommendations with only 12 out of the 40 analysts supporting a purchase at this time. With as many as 27 rating it as Hold, it could be right to wait and steer clear of the near-term risks.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.