Shopify Inc's (NYSE: SHOP) stock has recently surged over 20% in its stock price after reporting third-quarter earnings.
The stock has already delivered more than 100% in price return to investors over the past year. Whether there's potential for the rally to continue is what we'll be looking at here.
While the earnings beat coupled with the price surge did instill confidence among investors, the stock's valuation and potential economic headwinds cast a shadow of concern.
Business Highlights
Shopify managed to return to positive GAAP operating income this quarter. The company recorded a rebound in top-line revenue and an acceleration in GPV (gross payment volume).
The company's gross margin crossed the 50% threshold for the first time since Q2 FY2022. Continued acceleration in GPV in Q3 is also reflective of Shopify's successful efforts in acquiring new merchants. Factors contributing to this growth include the strong performance of merchants using Shopify Payments, increased adoption of the Shopify Plus category, and expanded usage of Shop Pay and integrated point-of-sale solutions in retail stores.
The company's strategic decisions to cut costs are already contributing to the expansion of profitability metrics, with operating margins improving. The business' operating cash flow is also strong, which should provide resilience in the face of an economic downturn. Additionally, the company is also investing in innovation and R&D which should help the company's offering keep pace with the evolving technological landscape.
Key Variable: The company's success, however, remains closely tied to GMV (gross merchandise volume) dynamics which are essentially the bread and butter of the business. The GMV could be impacted by a prolonged period of tight monetary policy conditions, as spending is constricted. High interest rates and macroeconomic uncertainty also add to Shopify's risk profile.
Valuation: There's no Black Friday bargain here. Moreover, the stock trades at a premium valuation at over $70 a share, representing a forward Price to Sales metric of 13.06. This, compared to its sector's median forward Price to Sales of just 2.59, raises a key question.
Does Shopify's business strength qualify for a 375% premium in price over its peers? Many would doubt.
The consensus rating for the stock stands at Neutral, with a price target of $52.15. Morgan Stanley analyst also indicated there is no upside left for the stock.
SHOP Stock Price Action: Shopify's stock was trading at $71.03 at the time of publication on Friday.