Why Shopify Stock Dropped 12.6% Despite Beating Earnings Estimates

Shopify stock (TSX:SHOP) dropped by over 12% on the TSX today after reporting earnings that beat estimates. So what happened?

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Shopify (TSX:SHOP) investors likely woke up to a surprise this morning. And it wasn’t a good one. Despite beating out earnings estimates, shares of the company dropped as much as 12.6% after earnings came out. So what exactly happened to the tech stock?

What happened

Shopify stock came in hot with strong profit and earnings that beat out estimates of analysts over and over again. The tech stock reported fourth quarter profit of US$657 million for the quarter, compared to a loss of US$623 million the year before.

Revenue was also up by 24%, to US$2.1 billion. This was almost double the year before at US$1.7 billion. The e-commerce company said on a per share basis this amounted to a profit of US$0.51 per share, compared to a loss of US$0.49 per share last year.

The revenue increase came as the company also saw its merchant solutions revenue rise to US$1.6 billion. This again was higher than last year, when Shopify generated US$1.3 billion. So thanks to the increased sales from merchants, the stock was able to bring in even more revenue. This also translated to higher subscription revenue as well, up to US$525 million from US$400 million.

So why the drop?

All these reports came in far above analyst estimates. Analysts expected the stock to report unadjusted earnings at US$0.22 per share, and US$0.30 adjusted earnings per share. Revenue was also higher than the forecasted US$2.1 billion, with gross merchandise volume up 23% to US$75.1 billion, higher than the anticipated US$72.5 billion.

The drop seems to come down to Shopify stock posting perhaps the highest future outlook for the company. For the first quarter, Shopify stock believes it will see overall revenue growth in the low-twenties percentage rate year over year.

The thing is, this falls within, and even slightly above, what analysts estimate for the company. Gross margins should increase about 1.5% quarter over quarter, with free cash flow in the single digits. But it seems investors are hoping for more.

Is that warranted?

In this case, you reap what you sow. Investors have been greedy when it comes to Shopify stock over the last few months. In fact, shares are up 12% year to date, and still up 79% in the last year alone. That’s a lot of share growth in a short period of time, so it’s no wonder investors were hoping for more from the company.

However, it might be a good thing that Shopify stock is being a bit more cautious in its future predictions. The sale of its logistics business still provides the company with strong cash on hand. And the stock continues to support investment into the platform and making it the easiest place for merchants to make money.

And that’s clearly working! Merchant sales are up, subscriptions are up, and this is all adding to the company’s bottom line. So while top line growth may be a bit slower, that bottom line growth remains strong. And that’s what I like to see as an investor.

Bottom line

The bottom line here is that Shopify stock is doing exactly what it should be doing. And this conservative forward guidance could easily be beaten. Especially if we see inflation and interest rates come down, leading to more shopping. And over time, the company is sure to bounce back. In fact, keep a watch on this tech stock. There are bound to be quite a few investors taking advantage of the dip on the TSX today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

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