After reporting its first quarter 2024 earnings results, arguably the most important set of results as they set the tone for the rest of the year in any stock, shares of Shopify Inc. (NYSE: SHOP) are plummeting by as much as 20% during the trading session. However, investors could see that this is a mere breather before the stock makes a potential recovery.
Sticking to the business fundamentals and further economic trends happening today in the U.S. economy, those who still have faith in Shopify’s value proposition could see more evidence backing a potential bull case. More than that, investors can gauge the stock’s future through a Wall Street analyst lens and how markets remain bullish on the name.
Comparing Shopify stock to peers like Salesforce Inc. (NYSE: CRM) and even Etsy Inc. (NASDAQ: ETSY) would show that, even after a steep decline in what turned out to be better than expected earnings, markets are still willing to pay a premium to be exposed to Shopify’s future earnings.
It’s All a Business Cycle Scare
For the first time since the COVID-19 pandemic, the two most important economic sectors – responsible for GDP growth – contracted simultaneously: Manufacturing and services.
Investors can follow these sectors’ activity through the ISM manufacturing PMI and the services PMI indexes. After contracting for more than 15 months, manufacturing looks to be returning, as it reported its first expansion reading for March 2024.
On the other hand, services are slowing down to have their first contraction reading since 2020, but that’s not necessarily bad news. Of course, seeing a slowdown all across services, Shopify investors may have chosen to take profits off the table.
However, a comeback in manufacturing can also signal a reset for services, as the two typically go hand in hand. And this time, the Federal Reserve (the Fed) comes to push both these sectors higher through proposed interest rate cuts this year.
Initially expected to come in March 2024, the CME’s FedWatch tool shows a 48.5% probability of a 25 basis point rate cut by September instead. Indeed, postponing these cuts may have thrown off a few investors who chose to avoid what could be a highly cyclical stock in Shopify.
Fundamentals Confirm, Just a Hiccup
Investors can check out Shopify’s press release for the quarter’s results and see headlines leading with a 29% revenue growth over the year. Double-digit revenue growth is far from a characteristic a contracting business carries, so investors can ease their grip so far.
If anything, businesses seeing their margins squeezed by stubbornly high inflation in the U.S. economy could call on Shopify’s solutions to help. Offering cheap and easy scalability to its customers, Shopify’s gross merchandise volume rose by 23% over the year to reach $60.9 billion.
At the same time, the company’s subscription solutions revenue jumped by 34% in the past 12 months, showing the resiliency of the business model in a contracting economy. But here’s where investors can really begin to relax.
Shopify’s free cash flow (operating cash flow minus capital expenditures) was reported at $232 million, up from $86 million a year prior (that’s a doubling!).
However, all of this is in the rearview mirror. Hence, management’s guidance becomes just as important for investors trying to figure out where Shopify may be headed.
A Bright Future Remains
Management points to double-digit revenue growth in the coming quarter. Free cash flow will remain at a similar margin to the first quarter, helping investors reach wealth compounding by keeping this stock as a potential selection.
Following this momentum, Wall Street analysts placed a 50.9% earnings per share (EPS) growth projection for this year in Shopify. The stock remains above Etsy’s 17.5% projections and 15% for Salesforce, and markets aren’t shy about making their preference for Shopify clear.
Shopify stock trades at a forward P/E ratio of 49. x, commanding a premium of 93% over Salesforce’s 25.6x valuation. Today’s valuation also calls for a 139% premium over Etsy’s 20.7x. Stocks typically trade at premium valuations for a good reason. Wall Street analysts see more than double-digit EPS growth ahead.
Analysts at Citigroup saw it fit to boost Shopify’s price targets up to $105. To prove these analysts right, the stock would need to rally by 67.2%, where investors have undeniable evidence to consider a second look into this recent dip.
Bears don’t feel comfortable running into short Shopify stock, as short interest declined by 3.8% over the past month.
