Shares of Shopify (SHOP +5.93%) sank after the e-commerce software company posted solid first-quarter results, but issued disappointing guidance.
Let's dive into the company's most recent results and guidance to see if investors should buy the dip. The stock is now down about 20% year to date.
Strong results, but lackluster outlook
Despite the stock's reaction, Shopify turned in some pretty solid first-quarter results. The company grew its revenue 23% to $1.9 billion, or by 29% when adjusting for the sale of its logistics business.
Gross merchandise volume (GMV) on its platform jumped 23% to $60.9 billion, while gross payment volumes soared 32% to $36.2 billion. This shows that more merchants are choosing to use its Shopify Payments option. Overall merchant solution revenue grew 20% to $1.4 billion.
Subscription revenue, meanwhile, surged 34% to $511 million, powered by growth in the number of merchants using its platform and price hikes.
Gross margins jumped from 47.5% to 51.4%, helped by the disposition of its lower-margin logistics business. Shopify generated $232 million in free cash flow in the quarter.
NASDAQ: SHOP
Key Data Points
Looking ahead, Shopify forecast second-quarter revenue growth to slow to a high-teens percentage rate. Adjusting for the sale of its logistics business, that would equal growth in the low- to mid-20s percentage range. It is expecting gross margins to slip 50 basis points compared to Q1, and for operating expenses to rise at a low- to mid-single-digit percentage rate compared to Q1.
Shopify's revenue forecast was similar to the consensus, with analysts looking for Q2 revenue growth of 19.5% at the time of the announcement. However, the company has consistently seen revenue growth in the low to mid-20% range over the past several quarters. Analysts were also looking for expenses to be relatively flat and not increase. Higher expenses versus expectations indicate that its earnings per share (EPS) will come in lower than analysts were originally expecting.
For high-growth stocks like Shopify, the price of the stock is often predicated on certain expectations of future growth. Whenever those growth expectations get lowered, it can affect the valuation multiple the stock commands and thus send the stock lower. Investors by and large appear to have been expecting higher revenue growth and lower expense growth moving forward.
Image source: Getty Images.
A potential buying opportunity
Overall, Shopify's guidance wasn't far off from expectations. There is also a good chance the company is being conservative and will eventually top its second-quarter forecast when it reports its actual Q2 results. Meanwhile, Shopify still has a lot of potential growth drivers ahead of it.
The company is pushing into the enterprise space, and recently added Coach, owned by Tapestry, as a customer for its outlet business. Shopify said enterprise customers are choosing to move to its platform due to its value, reliable infrastructure, and the cutting-edge offerings, as well as its ease of launch and continued innovation.
The company is continuing to innovate. Its new point-of-sale system is growing strongly, helping customers simplify their operations and enhance productivity through its AI product suite Shopify Magic. Accelerated checkout is another important innovative feature. Markets Pro, a native all-in-one cross-border merchant of record offering, helps with brands that sell their products in multiple countries.
Shopify is still in the early stages of the business-to-business (B2B) and international markets. It is seeing strong early success in the B2B space, with B2B GMV soaring 130% in the quarter after doubling last year. International is also growing nicely, with international GMV up 38% in the quarter, outpacing U.S. growth. International makes up less than 30% of Shopify's revenue, illustrating the potential upside for the company in these markets moving forward.
Following the dip in its stock price, Shopify now trades at about a 9.5x price-to-forward sales ratio. That's down from a 15x trailing price-to-sales (P/S) multiple that it recently commanded. Given that its organic growth (excluding acquisitions and dispositions) is still expected to be in the low to mid-20% range, that's a fairly attractive valuation.
SHOP PS Ratio (Forward) data by YCharts
While Shopify stock hasn't been dumped into the bargain bin, the stock is now trading at a much more attractive valuation than in the past for a business that still has a lot of upside ahead of it. As such, its recent earnings sell-off looks overdone and creates a solid entry point for long-term investors to buy this growth stock.
