Sometimes, even self-declared value investors can hold their noses and buy stocks that are overbought momentum plays according to traditional valuation metrics. Such may be the case with Shopify (SHOP -2.37%) stock, which is up sharply year to date but isn't necessarily out of gas quite yet.
If you have room in your tech stock shopping cart and don't consider "momo" a "no-no," Shopify stock is worth your while. Shopify's recent results largely speak for themselves, but the company could continue growing as it slims down and circles back to the e-commerce business that made Shopify a favorite among merchants and shareholders alike.
Three months of amazing gains
Describing quarterly beats as "across the board" is sometimes hyperbolic, but the term may actually apply to Shopify's first quarter of 2023. Before covering the usual top- and bottom-line metrics, prospective investors should take note of a key stat in online retail: gross merchandise volume (GMV), which Shopify grew 15% to $49.6 billion, beating the analyst community's call for $47.7 billion. And for balance-sheet buffs, Shopify's quarterly free cash flow of $86 million in Q1 2023 showed remarkable improvement over the negative free cash flow of $41 million the company recorded in the year-earlier quarter.
Turning to the top line, Shopify's quarterly revenue grew 25% to $1.5 billion, versus Wall Street's consensus forecast. Perhaps best of all, analysts called for Shopify to lose $0.04 per share, but the company delivered a positive surprise, reporting adjusted quarterly earnings of $0.01 per share.
While Third Bridge analyst Charlie Miner might consider the "beat on EPS and free cash flow" to be Shopify's "key wins," others may see more promise in the pivot to a profit -- but does it really matter which of Shopify's wins is the biggest hero? At the end of the day, both details work in Shopify's favor.
The company's refocus on e-commerce seals the deal
To be fair, it's entirely possible that the ultra-efficient market already priced in its enthusiasm over Shopify's first-quarter Street beats. Indeed, Atlantic Equities analyst Kunaal Malde's concern that Shopify stock "quickly reacted" to Shopify's "positive [Q1] developments" is duly noted, and should provide a moderating influence to anyone tempted to load the proverbial boat now.
That said, there's no denying Shopify's outstanding start to the year. Besides, Shopify's management is, I'd claim, moving the company in the right direction -- or perhaps I should say, promoting growth through targeted reduction. I'm not only referring to Shopify's plan to reduce its staff by 20%, though that's certainly one way to cut costs and potentially bolster the company's bottom line.
Along with the head count cut, Shopify is trimming the fat by divesting the majority of its logistics business. By selling its logistics assets to Flexport, Shopify will receive "stock representing a 13% equity interest" in the global logistics firm, "on top of its existing equity interest" in Flexport.
But beyond that, Shopify gets to eliminate a financial burden -- "a significant capex outlay," as Malde put it. Most of all, Shopify can focus its financial and human capital on what it does best: provide a go-to e-commerce platform for merchants big and small.
I won't deny that Shopify price-to-book, price-to-sales, and other commonly cited valuation metrics are significantly higher than their respective sector medians. That would often be a deal-breaker for me, but not in this case. I'm willing to make an exception for Shopify stock -- and you might consider doing the same -- as the company demonstrates powerful growth but still commits to a winning-through-slimming strategy.
