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Shopify Stock: Q3 Earnings Assessed, We’re Bearish (NYSE: SHOP)


Shopify (New York stock market :STORE) released its third quarter results this week and surprised the market with revenue of $30.33 million. In addition, the company showed better management of its income statement by beating its earnings per share estimate by 5 cents.

Market participants reacted positively before and after Shopify’s earnings beat as the stock jumped more than 18% during its last five trading days. However, we decided to analyze the stock’s outlook from a more holistic perspective and uncovered a few key variables investors should consider.

We previously assigned a high buy rating for the security; we are now downgrading Shopify to a sale; Here’s why.

Shopify Q3 2022 Revenue Review

Profit and Segment Analysis

Shopify operates through two main segments, namely merchant and subscription. In its most recent quarter, the company posted growth in both segments, with merchant revenue jumping by 26% year over year and subscriptions by 12%.

Shopify Segments


The continued growth of Shopify’s monthly recurring revenue is encouraging to see, as subscription-based businesses can be particularly cyclical. The company’s 8% year-over-year MRR increase speaks volumes, as tough economic times would likely have lessened for small businesses and individual entrepreneurs using platforms similar to Shopify.

One feature we applaud is Shopify’s subscription overlay. The company offers different tiers of offerings, with PRO and Plus subscriptions appealing to a slightly different customer base with altered revenue elasticity.

Additionally, the company’s merchant solutions add significant growth with an integrated business model that includes various payment, finance and supply chain solutions. Additionally, Shopify is geographically diverse, allowing it to formulate business relationships with a wide variety of merchants and auxiliaries.


Commercial quantification

Geographically Shopify

Commercial quantification


As mentioned earlier, Shopify caters to a variety of small and medium-sized businesses that likely have an oversensitivity to consumer sentiment. Therefore, the company’s fortunes could go two ways here.

Consider first the recent drop in consumer confidence (US only); Shopify’s core operations will likely take a hit if consumption slows. For example, a new business owner may re-enter the workforce and close their website.

On the other hand, we recently saw a reversal in US GDP growth (Shopify’s largest market) with a quarterly peak of 2.6% after a decline of 0.6% in the previous one. Thus, there could be a chance that the global economy is in better shape than we thought, which could, in turn, proliferate Shopify’s core business activities.

consumer confidence

The conference board

Data by Y-Charts

Looking ahead, Shopify expects revenue growth to continue strong with merchant-driven growth. Additionally, the company expects its operating expenses to slow down, which may be noted positively by shareholders as Shopify has been unprofitable for most of the last decadewhich has been bothering its investors lately.

Additionally, the company aims to repay its investors with $575 million in stock-based compensation (in the year 2022). This could be accretive for the stock unless other variables phase out the benefits.

The company has just acquired Deliver for $2.1 billion, which could squeeze gross margins in the near term. However, we believe the acquisition could add valuable long-term synergies as a vertically integrated acquisition.

Shopify's outlook for the year 2022


Plus, the acquisition added to Shopify’s amortization pile. We do not view business amortization expenses as a concern, as they are permitted to be capitalized once the associated intellectual property shows signs of generating significant economic benefits.

Depreciation and amortization of Shopify
Data by Y-Charts

Collectively, we think Shopify’s third quarter earnings report is encouraging. The company still needs to work on more efficient management of its income statement. However, strong integrated growth and smart acquisitions indicate that the company is on the right trajectory to present future residual value to its shareholders.

CAGR Y/Y 24.59%
TCCA 3-Y 54.69%
CAGR 5 years 55.29%

Source: Alpha Research

SHOP Stock Assessment and Performance Metrics

To be honest, we think Shopify’s relative rating metrics are pretty amazing. The stock is trading at more than eight times its sales, indicating that the market has significantly overhyped this stock. Additionally, the company’s forecast EBITDA growth rate of -49.36% suggests the value may remain scarce for some time.

I wish I had something positive to say about the stock’s valuation, but it’s not. We believe Shopify’s unfavorable valuation metrics are a key risk.

Price/sales ratio 8.23x
EV/Sales 7.58x
EBITDA growth (before) -49.36%

Source: Alpha Research

Final Thoughts

Is the SHOP share suitable for the current market climate?

This year’s bear market has been plagued by various systemic risks, such as the war in Ukraine, inconsistent global monetary policies, energy shortages in Europe and general supply-side inflation. As such, investors have chosen to steer away from growth stocks such as Shopify and into low volatility, high dividend paying assets. This is a usual occurrence in times of economic uncertainty, and it is likely to pick up again for a few more quarters until the risk of recession subsides. Thus, we believe the market is not right for the performance of a growth stock such as Shopify, and we believe it will experience further cyclical headwinds.

Shopify performance factors

Koy Fin

Last word

Shopify’s recent earnings report suggests the company is on an upward trajectory. However, various signs point to its stock being unfavorable as it does not convey much value to investors. Additionally, the current market environment is likely not conducive to growth stocks, and Shopify’s relative valuation metrics need to be better aligned. Thus, we assign a selling rating to Shopify.