Shares of e-commerce software company Shopify (SHOP 1.11%) got knocked down on Tuesday after the company reported financial results for 2023 and set some guidance for the first quarter of 2024. As of 11:30 a.m. ET, Shopify stock was down 11%.
What the market simply didn't like
Prior to today's drop, Shopify stock was up about 50% in just three months. Investors were increasingly optimistic because revenue growth was picking back up and its profit margins were improving. Those are good things that the market expected to continue. But guidance implies a step back in its upcoming first quarter.
Excluding the negative impact from discontinued operations, Shopify's fourth-quarter revenue was up 30%, boosted by a healthy 23% year-over-year increase in gross merchandise volume (the dollar value of sales on its platform). Moreover, the company had a whopping $446 million in Q4 free cash flow, which equates to a strong margin of 21%.
The chart below shows that Shopify's growth has picked up in recent quarters and its free cash flow is soaring, which accounts for investors' optimism in recent months.
SHOP Revenue (Quarterly YoY Growth) data by YCharts
Wall Street expected these recent trends to carry over into 2024. However, Shopify's guidance was below expectations, which is why the stock fell today on an otherwise strong report.
How bad is it?
For Q1, Shopify expects top-line growth in the high 20% range when excluding discontinued operations. That's a small step back from its Q4 growth of 30%. Additionally, it expects its free-cash-flow margin to be in the high single digits, not in the double digits like it was in Q4.
I can't help but think that Wall Street is being a little shortsighted here. Revenue growth is still strong and could pick up again in the back half of 2024, thanks to some recent price increases. Moreover, management expects its free-cash-flow margin to increase throughout the year.
Many investors are concerned about the valuation of Shopify stock, which I believe is valid. However, fears regarding the business are misplaced because Shopify continues to put forth strong operating results.
