Shopify (SHOP 1.07%) has its earnings results coming out later this month, and the stock price could be in danger of falling...again. Since reaching a high of nearly $410 back in August, the stock has experienced a big correction. However, things could get a lot worse for the company. Here's why.
1. Its growth rate will likely slip again
Shopify isn't growing as fast as it once was, and that's understandable; it wasn't going to keep doubling its sales forever. In its most recent quarter, the company's sales growth was 48%. While that's still very strong, it's down from the 62% of a year ago. It's been declining steadily, and the problem for Shopify is that the lower its growth rate gets, the less of a premium the stock is worth. A bigger correction could be just around the corner, especially if Shopify's growth rate gets closer to that of other, more mortal growth stocks.
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2. Rising expenditures could make profits even more elusive
Another reason Shopify could be even worse off when it releases its upcoming earnings is that it has been working on some new ventures, including getting into fulfillment as well as TV and film. That's going to add a lot of expenses to the company's financials, putting even more pressure on the bottom line. With Shopify already unprofitable and losses continuing to climb, reaching $65 million last year, things could go from bad to worse in the very near future.
3. Despite the fall in price, it's still expensive
As good as Shopify's stock has been, it's been trading at a wild premium for a long time. Even today, it's trading at an incredible 17 times book value, 29 times sales, and even its PEG ratio is getting close to 10. Shopify looks expensive from any angle, and if profits and sales decline again, these multiples will get worse, making it easier for investors to justify selling off the stock. Even though Shopify will likely still grow at a very high rate this quarter, it might not be enough to make investors more optimistic.
Key takeaways
Shopify is up sharply year to date, despite its sell-off in recent months. But with the markets struggling of late, especially with respect to growth stocks, it's become evident that investors are starting to place more emphasis on value. That could be problematic for Shopify, which has been able to defy value investing principles for much of the year.
Unless the company demonstrates this quarter that it's drastically improved its bottom line or found a way to increase its growth rate, the stock may continue to decline. With the stock having already generated some great returns this year, investors might be better off selling shares of Shopify before they tumble even further.
