It's been six weeks since shares of Shopify (SHOP 0.61%) hit all-time highs, just ahead of posting what would be disappointing second-quarter results. The e-commerce platform provider has now surrendered 17% of its value since peaking in late July, and it's easy to wonder if the monster growth stock that has still more than tripled since the start of last year will become a market darling again.
Investors seem to be moving on from Shopify. Trading volume has declined for four consecutive months. It's still early in September, but the early trend calls for stretching the streak of diminishing enthusiasm to five months. It doesn't have to be this way. Let's go over a couple of the things that would snap Shopify out of its late summertime slumber.
Image source: Shopify.
1. Decelerating revenue growth needs to slow down
Easing the foot off the accelerator isn't fatal. Shopify was one of the hottest stocks in 2016 and 2017, even though it has now clocked in with decelerating revenue growth for 10 consecutive quarters. An important data point here is that this stretch of 11 quarters started at 99.5% top-line growth in the fourth quarter of 2015, down to 61.5% in its latest quarter. The deceleration has come in manageable chunks.
Shopify is targeting $253 million to $257 million in revenue for the current quarter, translating into just 48% to 50% in top-line growth. Most companies would love to be generating that kind of robust year-over-year growth, but Shopify trades at a premium because it has historically grown its business at a headier pace. It has historically put out conservative guidance that it can trounce with ease, and that better be the case when it reports again in less than two months.
2. Guidance can't be a mixed blessing
Wall Street wasn't impressed with what Shopify's crystal ball had to offer in last month's financial update. The results seemed great at first glance. Revenue and adjusted earnings exceeded analyst expectations. Shopify also boosted its full-year guidance, but here's where there's more to the story than meets the analytical eye.
Shopify modeling $1.015 billion to $1.025 billion in revenue for 2018 is an upgrade to the $1 billion to $1.01 billion it was targeting back in early May, a $15 million boost on both ends of the range. The problem is that it beat its second-quarter guidance by $12.5 million, so all but a sixth of the increase is already in the past.
The math will get easier come early November. Shopify's forward guidance will be for just a single quarter instead of the second half of the year. Investors will know right away if it's boosting its full-year outlook by more or less than the third quarter's likely outperformance. Shopify can't mess that up if it wants a shot at revisiting this summer's all-time highs.
3. The earnings beats have to keep coming
Shopify has perpetually exceeded the market's bottom-line expectations. It hasn't even been close over the past year.
| Quarter | EPS (Estimate) | EPS (Actual) | Surprise |
|---|---|---|---|
| Q3 2017 | ($0.02) | $0.05 | 350% |
| Q4 2017 | $0.05 | $0.15 | 200% |
| Q1 2018 | ($0.05) | $0.04 | 180% |
| Q2 2018 | ($0.03) | $0.02 | 167% |
Data source: Yahoo! Finance.
There seems to be a disconnect between Wall Street expectations and where Shopify's adjusted profitability ultimately checks in, and that's good news for investors. A neat fact here is that Shopify has come through with an adjusted profit in each of the past four quarters, even as analysts were bracing for a loss. Well, Wall Street's bracing for another small deficit in the third quarter.
Bears will argue that beating profit estimates isn't enough, and that was certainly the case last time out. A few Wall Street pros slashed their price targets after that report. However, the stock had rallied to fresh highs just days ahead of the second-quarter earnings release. Expectations were high then, and that's not the case now. The stock is drifting lower in recent weeks, and if it hovers around here or lower when it reports again, another blowout quarter should have a more favorable market reaction.
