Shopify (SHOP) Down More Than 2%: Will the Weakness Stay?

Holding onto shares of Shopify Inc. SHOP might not be a good option at the moment. Shares of Shopify went down 2.6%, yesterday. Let’s delve deeper and try to find out what is taking this Zacks Rank #5 (Strong Sell) company down.

Estimates Moving South

Analysts have become increasingly bearish on the stock over the past couple of months. With 13 out of 16 estimates moving down in the past 60 days, the Zacks Consensus Estimate for current-year earnings has declined from 25 cents per share to 11 cents.

Low Return

Considering the other downsides like low return on assets (ROE), low return on assets (ROA) and low return on capital (ROC) the stock looks very unappealing. Shopify currently trades at a ROE and ROA of 1.8% and 1.6%, much lower than the industry average of 20.4% and 17.1%, respectively.  Notably, the company has an ROC of -4.7% compared with the industry average of 20%.

Growth Impediments

Shopify is relatively a new player in the eCommerce marketplace. Although it is not a direct competitor to behemoths like Alibaba and Amazon, many of its customers are. Moreover, the company focuses on the SMB segment which is more susceptible to macro-economic headwinds. Both factors present significant risk for its growth prospects.

Further, management expects results to be impacted by seasonality and a significant impact of foreign exchange on operating expenses.

Shopify Inc. Price

Shopify Inc. Price | Shopify Inc. Quote

Valuation Perspective

Moreover, the company is trading at premium in terms of Price/Sales. Shopify currently has a trailing 12-month P/S ratio of 20.95, which compares unfavorably to some extent with what the industry witnessed in the last year. The ratio is higher than the average level over this period.  Hence, valuation looks slightly stretched from a P/S perspective.

VGM Scores

Currently, Shopify has a poor Value Score of F. However, its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the growth side.

Overall, the stock has an aggregate VGM Score of C. Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Bottom Line

We recommend staying away from Shopify shares until the Zacks Rank, VGM Score and the estimates improve. If you really want to get in on the technology space, stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) are better. These include stocks like Facebook FB, NVIDIA Corporation NVDA and Paycom Software, Inc. PAYC, all sporting a Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank stocks here.

Facebook, NVIDIA and Paycom Softwarehave a long-term EPS growth rate of 26.18%, 10.25% and 25.75%, respectively.

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