The Downgrades For Shopify Are Rolling In
Shopify (NYSE: SHOP) is the most downgraded stock at the end of the Q4 earnings reporting cycle and we think it might be time to start looking into a purchase. The stock is down more than 66% from its high and offering a discount to the expectations even now, after a massive round of analysts downgrades. Of course, one downgrade is not the same as another and, in this case, means the analysts still want to own the stock and still see significant amounts of upside for share prices. The caution is that price action may move lower before it begins moving higher again.
So, as of mid-March 2022, there have been 24 downgrades or price target reductions issued for Shopify from among 35 analysts covering the stock, and 23 of them came out in the wake of the earnings release. The takeaway from the analyst chatter is that growth is slowing, margins are coming under pressure, and visibility is poor.
As it stands, the Marketbeat.com consensus rating is still a Buy but it is a weak Buy and down from a firm Buy in the 30 and 90-day comparisons. As for the Marketbeat.com consensus price target? The price target is down in the 1-year, 90-day, and 30-day comparisons but is still expecting about 113% of upside for the stock. The takeaway here is that 12 of the most recent analyst targets are in the range of $800 to $900 and suggest the consensus could fall further but even that range implies about 50% of upside at the low end.
Shopify Fails To Impress The Analysts
Shopify had an outstanding quarter but the growth was mostly priced in and the company warned of diminishing tailwinds, inflationary headwinds, slowing growth, and margin pressure, which is what caused share to slide. Regardless, revenue is up 41.1% from last year and beat the consensus by almost 300 basis points. The growth was driven by a 26% increase in subscription revenue that is in turn driven by an increase in merchant count. Merchant solutions revenue increased by 47%. Monthly recurring revenue, a key metric, increased by 23% and topped $100 million for the first time.
Moving down, the company reported margin pressure but not quite as bad as expected. The operating margin contracted by 1100 basis points on both the GAAP and adjusted levels leaving the adjusted operating margin at 9%. That produced $1.37 in adjusted EPS which is $0.06 better than the Marketbeat.com consensus estimate but that’s where the good news ends.
The guidance is calling for above-average growth for the company this year but there is a dark cloud hanging over it. The company says growth will slow to below this year’s levels and that there will be some weakness in the first half of the year. The Q1 period is expected to be down on a YOY basis with strength building by the end of the year. The Q4 period is expected to be the strongest, and it may be, but the Q4 period is a long way off and there are mounting headwinds within the economy for both the consumer and the company.
The Technical Outlook: The Shopify Selloff Is Overextended
The selloff in Shopify is overextended and that is no surprise given the level of institutional selling over the past four quarters. The institutions shaved more than 26% off the market cap and they may not be done. The good news is the price action looks ready to snap back and it may, given some good news rolls along. In the meantime, we will not be surprised to see price action in Shopify fall further, perhaps as far as the $400 level, before it begins moving higher.
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