Shopify’s (NYSE:SHOP) third-quarter results show that it is growing rapidly. The company’s profits, however, remain fairly low, while the valuation of Shopify stock is still sky-high. Meanwhile, the easing of the novel-coronavirus pandemic and further bankruptcies among small and medium businesses could hurt Shopify going forward.
Shopify’s top line jumped 96.5% year-over-year, while its revenue came in at $767.4 million, versus analysts’ average estimate of $652.6 million. The company noted that its gross merchant volume, or GMV, jumped 109% YOY in Q3, while the company’s Shopify Plus e-commerce platform added a record number of customers.
Fairly Low Profits and a Gigantic Valuation
The e-commerce company’s Q3 operating income, excluding some items, came in at $130.9 million. That’s not very high, given the company’s top line of nearly $770 million, its huge trailing price-sales ratio of 57, and its market capitalization of almost $120 billion.
On a positive note for Shopify and owners of Shopify stock, its Q3 adjusted operating income rose to nearly $131 million versus just $10.5 million during the same period a year earlier. And the company’s adjusted net income jumped to $140.8 million, versus a adjusted net loss of $133.2 million.
But its bottom line remains fairly low, given the shares’ valuation. That’s why the forward price-earnings ratio of Shopify stock is a staggering 435, according to Yahoo Finance.
Interestingly, the forward price-sales ratio of Fastly (NYSE:FSLY) stock, labeled (I think unfairly) by many pundits as one of the market’s most overvalued names, is 21.32, versus 32 for Shopify. And it can be argued that Fastly, much smaller than Shopify, has much bigger growth opportunities.
Potential Easing of the Pandemic and Small Business’ Problems
With vaccines for the coronavirus still poised to be released within the next month or two, the pandemic is likely to ease soon. This will cause consumer reliance on e-commerce to drop. Shopify’s management strongly suggested the easing of the pandemic would have a meaningful, negative impact on its business.
Specifically, Shopify CFO Amy Shapero said “there are more merchants coming to the platform with this shift to online commerce and COVID.”
The CFO also noted that the shutdowns of most brick-and-mortar stores at the beginning of the pandemic indirectly boosted the company’s GMV growth in Q3. Finally, she warned that the company’s monthly recurring revenue growth would likely decelerate in Q4 as the indirect impacts of the lockdowns drop.
Meanwhile, with U.S. government support of small and medium businesses drastically declining, many more small and medium firms may have gone bankrupt recently. That could very well have a significant negative impact on Shopify’s Q4 and Q1 results.
And it could take until late in Q1 or early in Q2 to pass a new stimulus bill. By that time, many more small and medium businesses could fail.
The Bottom Line on Shopify Stock
Shopify has a huge valuation and relatively low profits. Meanwhile, its business is likely to slow as the pandemic improves. And, the company could easily be hurt by the failure of many small businesses in coming months.
Given all of these points, I expect Shopify stock to, at best, remain rangebound in coming months. I think it will underperform the Nasdaq during that period. Further, in light its exorbitant valuation and negative catalysts, I believe that the stock’s longer term outlook is unclear.
On the date of publication, Larry Ramer held a long position in Fastly.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
