Despite its rampant rise to one of the top technology growth stocks, Shopify (SHOP, Financial) has been up against it lately, losing more than 70% of its market value since the turn of the year.
This year's bear market has been a tremendously unwanted scenario for high-beta technology bets, and Shopify's sensitivity to the economy is starting to show as recent events point towards a further stock price downturn.
Although the stock might seem cheap to many after previous high valuations, I think the opposite is true. Shopify will likely have to face a few more headwinds before it recovers; here are a few factors that are holding the stock back.
Earnings miss
Shopify reported its second-quarter earnings on Wednesday, revealing an earnings target miss of 6 cents per share and a revenue shortfall of $35.57 million.
Despite growing its omnichannel activities by 43% year-over-year and increasing its payments penetration to 53%, the company is facing slowing growth due to a fading economy.
The spark that lit the powderkeg and caused Shopify's earnings miss is probably its exposure to small- and medium-sized enterprises (SMEs), which are exceptionally sensitive to the economic climate. SMEs generally rely on a niche or don't have a vertically integrated process that would allow them to exhibit pricing power. Therefore, Shopify could be more susceptible to recessionary conditions given its exposure to SMEs.
Downgraded at Piper Sandler
Clarke Jeffries of Piper Sandler recently downgraded Shopify stock from buy to neutral with a $32 price target.
According to Jeffries, "While the outlook held some positive nuggets, the quarterly results point to an ecommerce environment that continues to deteriorate [year-to-date]... Ultimately, we see the balancing act of growth investments & efficiency targets as posing new execution risks - on top of navigating a normalization in ecommerce growth rates that we do not yet have visibility into stabilizing."
Even though Jeffries' argument likely won't effect Shopify's stock price on its own, the signs are that negative sentiment from Wall Street is starting to brew, which could cause significant problems for Shopify's investors in the short-run.
Valuation concerns
GuruFocus' valuation box suggests that Shopify stock is undervalued based on GF Value but overvalued on a lot of other measures. For example, free cash flow remains a concern as the projected FCF valuation model assigns a $7.56 price target to the stock.
Furthermore, Shopify is overvalued on a relative basis. The stock is also trading at a price-sales ratio of 9.02, implying that the market has overpriced the stock's top line.
Concluding thoughts
Shopify is up against it after its earnings miss. I believe the softening of the economy and negative sentiment on Wall Street will rule the day. Moreover, the stock looks overvalued on both an absolute and relative basis.
