Shopify, Inc. (SHOP) operates a cloud-based commerce platform designed for small and medium-sized businesses. Merchants use its software to run business across all sales channels, including web, tablet, mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. It is a Canada-based company that was founded in 2004.
Shares of Shopify have gains of about 19% in 2021, underperforming the gains of 23% for the S&P500. I am bearish on SHOP stock based on five worrisome reasons. 2022 may be a challenging year as value stocks may be in favor, and growth stocks could lose momentum.
The first reason is that after a long period of positive EPS surprises, SHOP earnings for Q3 2021 missed expectations. The actual EPS figure of $0.81 was weaker than the estimate of $1.23.
This EPS miss may be just occasional, but it could signal that a slowdown in earnings could be starting after a surge of revenue, EPS, and stock price in 2020 due to the pandemic crisis. Lowering profitability expectations would be negative for Shopify stock.
The second reason is that in Q3 2021, Shopify also missed revenue which came in at $1.12 billion, up 46%. Analysts expected Shopify to report revenue of $1.15 billion. Analysts expect a sales growth slowdown in 2022 to 33.6% from an expected sales growth of 56.5% for 2021.
Despite a terrific 2020 that made its shares skyrocket from less than $500 in early January to $1,285 on December 22, 2020, SHOP has not been able to significantly improve its gross margins.
In 2017, Shopify had a gross margin of 56.5%. It could not improve this figure in the years that followed, posting lowering gross margins. In fact, in 2020, its gross margin was 52.6%.
Higher gross margins are, in most cases, an indication of higher profitability. As in 2020, Shopify turned profitable with a net margin of 10.9%; I would like to see its operating margin and its net margin expanding in 2021.
The fourth factor is that Shopify corporate insiders have mostly sold shares as of early summer. It may be just a random pattern, but if this trend persists, then it may signal that the management of Shopify considers its share price to be rich and an opportunity to lock in some gains.
The fifth factor is a combination of valuation, adding my worries about Shopify supporting bitcoin as means of payment. In recent news, the firm announced it will be supporting NFT trading and minting. Bitcoin is highly volatile and can distort the financials of Shopify if a significant amount of revenue is focused on it.
Regarding valuation concerns, SHOP stock is relatively overvalued based on its P/E ratio of 47.2x compared to the U.S. IT industry average of 36x and based on its P/B ratio of 14.2x compared to the U.S. IT industry average of 4.4x.
Wall Street’s Take
Turning to Wall Street, Shopify has a Moderate Buy consensus rating based on eleven Buys and nine Holds assigned in the past three months. The average Shopify price target of $1,659.14 implies 22.4% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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