Given Shopify’s (NYSE:SHOP) stratospheric valuation, its fourth-quarter results simply weren’t that impressive. Wall Street appears to be noticing the divergence between the company’s results and the valuation of Shopify stock. As a result, the shares are unlikely to beat the market going forward and could decline from their current levels.
With the shares trading at a gigantic price-to-sales ratio of nearly 40, the company should really be earning meaningful profits. If not, its growth should be sky-high, or at least accelerating tremendously.
Shopify’s business is currently not profitable, as it generated an operating loss of $30.1 million last quarter, and its overall 2019 net loss came in at $1.10 per share. And for 2020, it expects an operating loss as high as $20 million.
Shopify’s Q4 Results Don’t Justify Its Valuation
The company’s lack of significant profits could be excused if its revenue was growing at least 60%-80% year-over-year or its top-line growth was accelerating. But neither of those scenarios is unfolding. Shopify’s revenue jumped 47% year-over-year in Q4, and its gross profit increased 42%. In the third quarter, its top line and gross profit surged 45%.
So its revenue growth barely accelerated last quarter, while its gross profit growth actually dropped. Further, both metrics are only increasing in the 45% range. Some bullish analysts noted that the company’s profitability was pressured by worthwhile investments that it’s making in its logistics operations. But gross profit excludes those investments, and Shopify’s gross profit growth is simply not accelerating.
Meanwhile, based on the midpoint of its full-year 2020 revenue guidance, the company actually expects its top-line growth to meaningfully decelerate to 36%. Even if the guidance turns out to be very conservative, as is typical for Shopify, I doubt the company is targeting year-over-year revenue growth much above 45% in 2020.
Analysts Are Bearish on Shopify Stock
A note from Credit Suisse analyst Brad Zenick, issued in the wake of the fourth-quarter results, indicates that the Street is ready to hit the brakes. The analyst wrote:
“We firmly contend Shopify is a great business and has one of the largest [total addressable markets] in our coverage universe, but we see a more balanced risk-reward at 28 times fiscal 2020 revenue and following 286% share price appreciation since the beginning of 2019…”
Calling the stock’s valuation “lofty,” Zelnick cut his rating on the shares to “neutral” from “outperform.”
Meanwhile, in the wake of the quarterly report, at least five analysts raised their price targets on Shopify stock. But only one, Wells Fargo’s Timothy Willi, has a target more than 10% above the stock’s Feb. 14 opening price of $540. Willi maintains his “overweight” rating and $600 target.
And as InvestorPlace’s Ian Bezek pointed out last month, some estimates put Shopify’s fair value at $175. I doubt the fourth-quarter results caused him to meaningfully change his mind.
Moreover, on the morning of Feb. 12, the day after the results were unveiled, Shopify initially shot up to $571. The shares have largely gone downhill from there. On the afternoon of Feb. 14, they had retreated to $540. I think we could see a continuation of the negative trend going forward.
The Bottom Line
Shopify is obviously growing rapidly, and it looks poised to help thousands more brick-and-mortar businesses take on Amazon (NASDAQ:AMZN) in the e-commerce arena. Still, given the stock’s huge valuation, the company’s revenue and gross profit growth aren’t anything to write home about. And perhaps more importantly, they aren’t meaningfully accelerating. Further, multiple analysts think that the company’s shares are overvalued.
As I wrote in my previous column on Shopify, the shares can rally if the company’s logistics business becomes very profitable or if it’s able to penetrate the rapidly growing Chinese e-commerce sector. Until it reaches one of those milestones or its growth shows signs of meaningfully accelerating, I think the shares will, at best, perform in line with the market.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies.
