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Can Shopify get back to its all-time-high? Why market dislike the Q4 Earning?

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TJ Research wrote a column · Feb 17, 2023 01:48
Can Shopify get back to its all-time-high? Why market dislike the Q4 Earning?
Shopify$Shopify(SHOP.US)$ was among Wall Street's favorites companies in 2020 and 2021. It went up by 4x since COVID low. But things turned sour quickly, between November 2021 and October 2022, the stock dropped by 84%! It had a decent run in 2023 along with other unprofitable companies, but a 16% drop post earnings might be a wake-up call to the investors.
On the surface, Shopify beat both bottom line and top line. Let's take a deeper look at its financials.
Source: Q4 2022 Earning
Source: Q4 2022 Earning
Revenue grew 26% from $1.38B to $1.73B on a YoY basis. But growth profit only grew 15.6% due to its margin contraction. Its high margin component, subscription solutions, only grew by 14%. GMV increase by 13% which showed some resiliency of E-commerce among global headwinds.
The real problem with the company or the management rather is the expense. 45% increase in operating expense YoY is crazy in this environment. In particular, Shopify's R&D and G&A expenses increased by 61% and over 100% respectively. Big techs are cutting cost big times due to revenue headwinds so they could keep as much profits to its shareholders. But Shopify doesn't seem to care about its outrageous spending. One analyst asked the question on Q1 guidance: It doesn't seem that you are focused on profitability among macro headwinds, any plans for profitability? Shopify management simply dismissed the question and said they rather focus on growth and profitability will come naturally. Based on the spending pattern Shopify is on, profitability will not come naturally. They are betting on improvement of macro backdrops and once growth picks back up, they will be back on hyper growth mode again. This is a very risky bet. Even Shopify is loaded with cash, management should always prepare for the worst and have discipline on spending. In my opinion, this question really put down analysts' hope on the company might cut cost to improve its EBITDA
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Source: Bloomberg
Source: Bloomberg
Looking at Street’s forecast, FY23 of EV/EBITDA at 2902 and FY23 at 68 is still very expensive given where the 10 year yield is at. The company will ultimately become a buy once its valuation starts making sense again but the time is not now.
Disclosure: The author does not own SHOP at the time of this writing and this is not financial advice
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    Love doing research on companies, macro and hot financial topics More at: https://tjresearch.substack.com/
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