On Wednesday, Citi adjusted its outlook on Shopify Inc . (NYSE:SHOP), reducing the price target to $93 from the previous $96 while maintaining a Neutral rating on the stock. The revision follows Shopify's strong performance in the fourth quarter, where the company exhibited significant gross merchandise volume (GMV) and revenue growth. The growth, described as mid-20s percentage points and 400 basis points above expectations, signaled Shopify's increasing market share and the continued success of its e-commerce platform in attracting new merchants at a rate surpassing industry growth.
Despite the robust quarter, the company's forecast for weaker profitability in the first quarter, with an estimated non-GAAP operating margin (NG OPM) of around 9% compared to the anticipated 14% by Citi and consensus, contributed to a tempered outlook for the stock. Additionally, a slight miss in the expected expansion of the take rate—a measure of the percentage of sales revenue Shopify takes as a fee—also influenced the shares negatively.
Shopify's commitment to innovation and expansion, particularly in adjacent products like business-to-business (B2B) offerings and point-of-sale (POS) systems, was recognized. However, the anticipated increase in marketing spending is expected to impact margins in the near term. This has led to a cautious approach from Citi, suggesting that the stock might pause after its substantial 50% increase since the last earnings report.
Citi's revised estimates are also looking ahead, considering Shopify's current valuation. The stock is trading at approximately 56 times the forecasted free cash flow (FCF) for the calendar year 2025, which is notably higher than the large-cap average of around 35 times. This valuation metric is a key consideration for Citi's analysis and the timing of a more favorable entry point into the stock.
InvestingPro Insights
As Shopify Inc. (NYSE:SHOP) navigates through its latest financial quarter, InvestingPro data and insights provide a deeper understanding of the company's current market position. With a market capitalization of $101.04 billion, Shopify's scale as a tech giant is evident. However, its valuation multiples suggest a premium price for its shares. The company's P/E ratio, standing at a lofty 766.7, and an even higher adjusted P/E ratio for the last twelve months as of Q4 2023 at 1550.65, reflect investor optimism about future growth but also indicate a stock that is trading at a high earnings multiple.
Shopify's revenue growth remains strong with an increase of 26.07% over the last twelve months as of Q4 2023, showcasing the company's ability to expand its sales in a competitive e-commerce market. Despite this, the company's operating income margin was reported at -2.47%, revealing challenges in translating top-line growth into operating profitability.
InvestingPro Tips highlight that Shopify is a prominent player in the IT Services industry, but the stock has experienced a significant decline over the past week, with a one-week price total return of -9.38%. This recent performance may be of interest to investors considering the stock's high return over the last year of 54.02%. Additionally, Shopify does not pay a dividend, which could be a factor for income-focused investors.
For those looking to delve further into Shopify's financial health and future prospects, InvestingPro offers a suite of additional tips. There are 18 more InvestingPro Tips available, which can provide investors with a comprehensive analysis to inform their investment decisions. Interested readers can utilize the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, accessing these valuable tips at https://www.investing.com/pro/SHOP.
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