The internet is considered the most crucial tool in a globalized world. It is a near-ubiquitous aspect of modern life, which has completely transformed how we communicate, shop, work, and have speedy access to information. As per Statista, as of April 2023, there were 5.18 billion internet users worldwide, which amounted to 64.6% of the global population.

Moreover, as the digital transformation of several industry verticals requires broadband services, the global broadband services market size is expected to grow at a CAGR of 9.7% from 2023 to 2030. Given this backdrop, let us consider whether internet stock Shopify Inc. (SHOP) could be an ideal portfolio addition or not.

Headquartered in Ottawa, Canada, SHOP is a leading e-commerce company that provides commerce platforms and services. The company's platform enables merchants to display, manage, market, and sell their products through various sales channels.

On June 6, SHOP announced the completion of the previously announced sale of the majority of its former Shopify Logistics business to Flexport, a leading tech-driven global logistics platform.

In connection with the sale, SHOP received stock representing a 13% equity interest in Flexport, which is incremental to its existing equity interest in Flexport. Flexport will become the official logistics partner for SHOP and the preferred provider for Shop Promise.

Over the past year, the stock has gained 64.2% to close the last trading session at $63.25. Over the past five days, the stock has declined 2.3%.

Here is what could influence SHOP’s performance in the near term:

Mixed Financials

For the fiscal first quarter that ended March 31, 2023, SHOP’s revenues increased 25.2% year-over-year to $1.51 billion, while its gross profit came in at $717 million, up 12.4% from the prior-year quarter.

However, its total operating expenses increased 23.6% from the prior-year quarter to $910 million, while loss from operations stood at $193 million, up 96.9% year-over-year.

SHOP’s adjusted net income and adjusted net income per share attributable to shareholders stood at $12 million and $0.01, down 52% and 50% year-over-year, respectively. Its cash and cash equivalents for the same quarter stood at $1.74 billion, down 29.1% year-over-year.

Impressive Historic Growth

SHOP’s revenue grew at 50.6% and 50.7% CAGRs over the past three and five years, respectively. The company’s tangible book value and total current assets have also increased at 34.3% and 46.7% CAGRs, respectively, over the past three years.

Stretched Valuation

In terms of its forward non-GAAP P/E, SHOP is trading at 194.29x, 777.6% higher than the industry average of 22.14x. Also, SHOP’s EV/EBITDA and EV/EBIT of 240.16x and 231.30x are significantly higher than the industry averages of 14.42x and 18.12x, respectively.

Mixed Profitability

SHOP’s trailing-12-month asset turnover ratio of 0.52x is marginally higher than its five-year average of 0.51x. However, its trailing-12-month levered FCF margin of 4.04% is 24.3% lower than its five-year average of 5.34%.

POWR Ratings Reflect Uncertainty

It's no surprise that SHOP has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SHOP has a C grade for Quality, consistent with its mixed profitability scenario.

Moreover, SHOP has a C grade for Momentum. It is trading lower than its 10-day moving average of $64.16. However, it is trading above its 50-day and 200-day moving average of $57.27 and $43.10, respectively.

SHOP is ranked #20 out of 29 stocks in the Internet - Services industry.

Click here to access SHOP’s POWR Ratings for Growth, Sentiment, Stability, and Value.

Bottom Line

In the existing macroeconomic scenario, where inflationary pressures are weighing heavily on the financial conditions of businesses, SHOP does not seem to be immune from it either. The company believes that its inability to offset higher costs through price increases could harm its business, financial condition, and results of operations.

Hence, considering SHOP’s mixed financials, waiting for a better entry point in this internet service stock could be wise.

How Does Shopify Inc. (SHOP) Stack Up Against Its Peers?

While SHOP has an overall grade of C, equating to a Neutral rating, check out these other stocks within the Internet - Services industry: Liquidity Services, Inc. (LQDT), with an A (Strong Buy) rating, and Shutterstock, Inc. (SSTK) and Points International, Ltd. (PCOM), with a B (Buy) rating.

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SHOP shares rose $0.31 (+0.49%) in premarket trading Tuesday. Year-to-date, SHOP has gained 82.22%, versus a 13.67% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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