Shopify Stock Down 14% Today – Time to Buy SHOP Stock?

The price of Shopify stock is declining 14% during today’s stock trading action after the company announced that it will be acquiring e-commerce fulfillment provider Deliverr for $2.1 billion in a cash-and-stock transaction.

The announcement came alongside the release of the firm’s financial results covering the first quarter of the 2022 fiscal year. The company stated that 20% of the transaction will be paid in stock, meaning that Shopify will have to issue around 865,000 shares based on yesterday’s closing price – a figure that represents less than 1% of the company’s total shares outstanding.

“Together with Deliverr, Shopify Fulfillment Network will give millions of growing businesses access to a simple, powerful logistics platform that will allow them to make their customers happy over and over again”, stated Tobi Lütke, the company’s Chief Executive Officer, in regards to the acquisition.

The main objective of the purchase is to reduce delivery times and gain more control over the supply chain of the millions of merchants that rely on Shopify’s e-commerce platforms for their online operations.

The company stated that the acquisition will be dilutive to its operating margins and anticipates an additional $200 million in capital expenditures in 2022 from Deliverr alongside around $800 million in additional stock-based compensation expenses and payroll taxes.

During the three months ended on 31 March, the company reported total revenues of $1.2 billion resulting in a 22% year-on-year jump. Subscriptions solutions were up 8% compared to the same period a year ago at $344.8 million while the Merchants Solutions segment experienced a 29% year-on-year leap at $858.9 million. The consensus estimate from analysts for Shopify’s top-line results stood at $1.24 billion as per data from Seeking Alpha.

Meanwhile, operating losses came in at $98 million for an 8% operating margin that resulted in a 400 basis points improvement compared to Q1 2021.

GAAP net losses ended at $1.5 billion compared to $1.3 billion the firm shed the previous year while, on an adjusted basis, the firm produced profits of $25.1 million or $0.20 per share compared to $254.1 million and $2.01 it generated last year. The consensus estimate from analysts for the firm’s adjusted EPS stood at $0.65 per share.

There has been a wave of negative actions from analysts following the release of this report with Wedbush Securities, Deutsche Bank, and Roth Capital, among others, already trimming their price targets for the firm.

These lower 12-month estimates from the analysts covering the stock are probably the reason why Shopify is dropping sharply today.

What could be expected from this tech stock following the release of this quarterly report? In this article, I’ll be assessing the price action and fundamentals of Shopify stock to outline plausible scenarios for the future.

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Shopify Stock – Technical Analysis

Today’s decline is pushing the price of Shopify near its all-time lows while the stock is currently trading around 64% below its 200-day simple moving average. This drop has been primarily prompted by the confluence of negative external catalysts that have caused a risk-off move in the markets.

Some of these catalysts include the Federal Reserve’s hawkish comments and multiple planned interest rate hikes for 2022, the war between Russia and Ukraine, a fading pandemic tailwind for the company, and the global supply chain crisis – which has a direct impact on the platform’s merchants.

The nearest area of support for SHOP if the stock keeps declining is standing at around $340 per share resulting in a 17% downside risk. Momentum indicators are favoring a bearish outlook as the Relative Strength Index (RSI) is standing at 34 and still on a downtrend while the MACD is neck-deep into negative territory.

Moreover, today’s decline has been accompanied by above-average trading volumes with a total of 10 million shares exchanging hands – 2.5x the daily average.

Shopify Stock – Fundamental Analysis

In regards to the report, analysts from Wedbush Securities commented that macro conditions “still put pressure on near-term results and estimates as consumers adjust to the new balance of in person versus online, as well as inflation, lack of stimulus, supply chain headwinds, and other macro concerns”.

This opinion from Wedbush reflects the general consensus about the company’s prospects and provides the rationale for the sharp downturn that the stock has been experiencing.

Based on the consensus projection for Shopify’s revenues for 2022, the company is still trading at a lofty forward P/S ratio of 10x.

Meanwhile, the firm’s path to GAAP profitability remains murky, especially now that this acquisition is expected to have a negative impact on Shopify’s operating margins.

Shopify is an incredible business with a sound value proposition. The company had $7.25 billion in cash, equivalents, and marketable securities by the end of March and less than a billion in convertible senior notes (debt).

However, in the current environment, its trading multiples remain particularly high considering that the firm is still cash-flow negative and far from becoming a profitable entity.

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