It’s time to put Shopify stock back on the buy list

Key Points

• Shopify had a solid quarter and is guiding for growth, but FCF will be impaired and is weighing on the stock price.
• Growth is supported by accelerating merchandise volume and service penetration, so guidance may be light. 
• Analysts see a substantial upside for the market but may trim targets now that guidance is in. 

Shares of Shopify NYSE: SHOP fell hard following the Q4 results, and for good reason. The news and guidance left the market in doubt about earnings in 2024, sparking a reset for the market. The good news is that the new outlook is more reasonable, setting the company up for outperformance later in the year. 

Shopify outperforms on volume and penetration of services in Q4

Shopify had a solid quarter in Q4, with nothing disappointing in the results. The company produced $2.14 billion in revenue for a gain of 23.7% over last year, beating the Marketbeat.com consensus by 340 basis points. 

Revenue strength was driven by a 23% increase in gross merchandise volume driven by increased Merchant Services, up 21%, and deeper penetration of payment services. Payments services volume grew nearly 32% YOY, accounting for 60% of the GMV, and penetration is expected to continue. Subscription Services is another area of strength, up 31%, with monthly recurring revenue up 35%. 

The margin news is impressive. The divestiture of the logistics business significantly improved the margin, which was aided by accelerating GMV growth and penetration of services. The gross margin improved by 350 basis points while the FCF margin, which matters most, grew by 1600. Free cash flow came in at $466 million or up 395%, and is expected to remain strong in 2024, but the guidance has a problem. 

Shopify is expecting another solid year in 2024. Growth will slow but remain robust in the low 20% range, including the logistics business's divestiture, and may exceed guidance as price increases and AI aid top and bottom-line results. The gross margin is expected to widen by 150 basis points, which is more good news, but the free cash flow margin will contract to the high single digits. Free cash flow is expected to improve sequentially as GAAP operating expenses decline. 

Shopify has a fortress balance sheet 

The FCF guidance is problematic and to blame for the stock price implosion. However, FCF is expected to remain sufficient to sustain the company’s fortress balance sheet. The cash position is down slightly compared to last year but is still solid, and the balance sheet is net cash. Leverage is also low at 0.1X equity, and the accumulated deficit and shareholder equity are improving. The deficit fell 25% and may disappear soon; shareholder equity is up 10% and is expected to grow as the year progresses. 

Analysts see substantial upside for Shopify stock, but the road higher may not be an easy one. The consensus is lagging the market but up 40% in the last year and 5% in the month leading up to the report, with most new targets above the pre-release stock price action. The highest target of $100, 25% above the current target, was set in mid-January by National Bankshares and affirmed a few days later by CBIC. Analysts are unlikely to alter the consensus Hold rating now that 2024 guidance is in, but they may start trimming their price targets. 

The technical outlook: Shopify falls into the bargain basement

Shopify's share price fell hard following the release, but the worst of the move may already be over. The market fell to a critical support level, and support is still present. Assuming the market can sustain the $78 level as support, it should enter consolidation and move to the side. If not, Shopify could move down toward the consensus of $73, aligning with the 150-day EMA. In this scenario, a solid rebound should form once the move is complete. In either case, investors should keep this stock on their watchlist and prepare for the next buying opportunity.