Shopify Stock Down 8% in February – Time to Buy SHOP Stock?

The price of Shopify stock has declined nearly 8% so far this month as an expected shift in the macro environment has kept weighing on the valuation of growth stocks.

The Canadian e-commerce giant is scheduled to report its earnings covering the fourth quarter of the 2021 fiscal year today before the United States stock market opens and analysts are expecting to see how the company fares amid a fading pandemic tailwind.

In the past quarter, Shopify missed analysts estimates for both revenues and earnings. However, shares kept climbing until November last year when they posted all-time highs to then drop sharply to its current levels.

A shift in macroeconomic conditions amid rampant inflation in the United States and other corners of the world has been the primary catalyst for this decline.

This morning, the yield of the US 10-year Treasury Note is standing above 2% and has remained near that level in the past few days.

For equities, higher Treasury yields typically mean higher risk premiums, which lead to lower valuations.

For this upcoming quarterly report, analysts are expecting to see Shopify’s revenues landing at $1.34 billion resulting in a 37.2% year-on-year jump with the lowest estimate sitting at $1.2 billion and the highest at $1.44 billion.

Meanwhile, the consensus estimate for the firm’s adjusted earnings per share is standing at $1.31 with the lowest estimate sitting at $0.58 and the highest at $2.61 per share.

What could be expected from this e-commerce stock ahead 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

The price of SHOP has declined more than 35% since the year started while the stock is trading nearly 50% below its 52-week high of $1,762.9 per share. These significant losses emphasize the extent of the negative momentum that the stock has been experiencing in the current environment.

Multiple areas of support have been broken along the way with the next one currently standing at $681.5 per share in case market sentiment toward the company continues to be negative following the release of its Q4 2021 earnings report.

Momentum readings are starting to turn but they remain heavily depressed with the Relative Strength Index (RSI) standing at 42 (bearish) while the MACD is neck-deep into negative territory although it just climbed above the signal line.

Options prices are implying an expected 11.6% fluctuation in the price of Shopify following the release of its earnings report and, considering the negative sentiment that is prevailing at the moment, a revenue or earnings miss or a downbeat tone from the management concerning the company’s outlook could lead to a sizable decline in Shopify’s stock value.

All things considered, the outlook for SHOP is neutral-to-bearish depending on how the earnings report goes. If the price drops below the $680 threshold, chances are that the downtrend could accelerate in the following days.

Shopify Stock – Fundamental Analysis

Shopify’s top-line growth has been impressive. However, the pandemic was a key catalyst for the company’s performance as revenues were growing at a slower pace before the health crisis started.

For 2022, analysts are expecting to see a slowdown in the company’s growth rates amid its elevated pandemic-era comps.

On the positive side, Shopify reported its first profitable year in 2020. Moving forward, analysts expect that the company will continue to report positive bottom-line performance.

In the past 12 months, Shopify’s GAAP operating profit margin climbed to 11% compared to 6% it reported in 2020.

Meanwhile, Shopify produced positive cash flows of $457 million during this same period compared to $384 million it produced in 2020.

Based on the market’s sales estimates for 2022, the company is trading at a forward price-to-sales ratio of 18.4x and at nearly 245 times its cash free cash flows from the past twelve months.

Despite the firm’s attractive top-line growth, these valuation multiples remain heavily stretched and they create room for further negative volatility down the road. Therefore, investors should still approach Shopify stock with caution in the current environment as a tighter macro landscape could continue to depress its valuation multiples.

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