Shopify (SHOP 1.11%) shares have soared over the past year, but the rally in the e-commerce stock came to an abrupt halt on Tuesday after its fourth-quarter earnings report came out.
Even though the software-as-a-service (SaaS) stock beat headline estimates, it fell 13% the day following the report, giving back some of its recent gains.
Shopify's overall results were strong and show the company has recovered from the lull in e-commerce during the economic reopening that came after the pandemic. Revenue in the quarter was up 24% to $2.14 billion, or 30% when excluding the impact of the sale of its logistics business. That result beat estimates at $2.08 billion.
Growth was strong across the board as gross merchandise volume (or GMV, the total value of goods sold on the platform) was up 23% to $75.1 billion. Gross payments volume also climbed 32% to $45.1 billion, making up 60% of GMV in the quarter.
On the bottom line, the company saw a dramatic improvement in free cash flow, which jumped from $90 million in the year-ago period to $446 million, and the company reported a generally accepted accounting principles (GAAP) operating income of $289 million, which translates into an operating margin of 13.5% in its seasonally strongest period of the year. That figure shows Shopify is finally becoming a solidly profitable company on an unadjusted basis, which should give investors some confidence going forward.
On an adjusted basis, earnings per share jumped from $0.07 in the quarter a year ago to $0.34, which beat estimates at $0.31.
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Why Shopify stock fell
Fourth-quarter results were strong, but the stock is suffering from the same problem that torpedoed it during the bear market crash in 2022.
Shopify shares had nearly doubled in the year leading up to this latest earnings report, and its price-to-sales ratio had ballooned to more than 16, giving some investors pause as it was below 10 as recently as Oct. 2023. Shopify has also reported just one annual GAAP operating profit, in 2021, when its results were fueled by pandemic-driven online shopping, meaning investors still need to be convinced it can deliver a profitable year in a normal environment.
Looking ahead to the first quarter, the company forecast revenue growth in the low-20% range, or high-20% range when excluding the impact of the sale of the logistics business. That was a weaker forecast than the 26.5% growth analysts expected. Its operating expense forecast also indicated profits would fall substantially from the fourth quarter.
Is Shopify a buy?
The sell-off in Shopify shares last week seems largely due to concerns about the valuation and its first-quarter guidance, but neither of those reflect underlying fundamentals.
The sell-off has pushed its price-to-sales ratio below 15, and the first-quarter guidance is also a poor reason to sell the stock. In fact, management explained that the increase in operating expenses was due to higher spending on marketing and salaries, which should help drive revenue growth in future quarters.
Despite the double-digit decline in the stock on Tuesday, the business still looks just as healthy as it was before the report, but investors should expect more modest gains going forward.
Shopify still looks like a buy for long-term investors, but it's unreasonable at the current valuation to expect the kind of explosive gains the stock delivered over the last year. High expectations are now baked in, and the company will need to deliver.
