You would normally expect a company’s stock to rally when it delivers impressive revenue growth, stronger profits, and higher cash flow. But the stock market doesn’t always reward good results, especially when investors have already set their expectations really high.
Shopify (TSX: SHOP) is a good example of this right now. Despite posting another quarter of solid financial growth, the Canadian e-commerce giant narrowly missed Wall Street’s revenue expectations, triggering an 8% plunge in its share price on the earnings release day. However, with the holiday shopping season approaching, this recent weakness could make SHOP stock even more interesting for long-term investors. After all, strong business fundamentals can matter more than short-term market reactions.
In this article, I’ll explain whether buying, selling, or holding Shopify stock makes the most sense before the holidays.
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Shopify stock
After rallying 46% over the last six months, Shopify stock has come under pressure following the release of its third-quarter earnings. With this, it has lost nearly 10% of its value over the last month and currently trades at $210.47 per share, giving it a market cap of about $271 billion.
Interestingly, the market’s negative reaction to Shopify’s latest results contrasts with its continued business growth. Still, its latest earnings offer some clues about why Wall Street wasn’t fully impressed. Let’s take a closer look.
Strong quarterly results with a slight disappointment
In the third quarter, Shopify’s total revenue surged 32% year-over-year (YoY) to US$3.7 billion. While this growth was impressive, the revenue figure narrowly missed analysts’ expectations. Similarly, its reported quarterly earnings of US$0.36 per share fell slightly short of estimates.
Despite these disappointments, Shopify’s underlying business continued to expand rapidly. Its merchant solutions revenue jumped 35% YoY, while subscription solutions revenue climbed 20%.
At the same time, the total value of merchandise sold through Shopify’s platform grew by 29% YoY to over US$119 billion, highlighting growing commerce activity across its platform.
That’s not all. The Canadian tech giant also generated US$816 million in free cash flow last quarter, reflecting an impressive 61% YoY rise. Its free cash flow margin also expanded to 22% from 18% a year ago.
Clearly, Shopify’s latest results weren’t as disappointing as its sharp stock price decline might suggest. The company continues to grow rapidly while improving profitability and generating more cash.
Should you buy, sell, or hold Shopify stock before the holidays?
Now that Shopify’s stock has taken a hit despite its improving fundamentals, the upcoming holiday shopping season could be an important opportunity for the company to regain investors’ confidence.
Interestingly, Shopify expects strong growth to continue in the fourth quarter, with revenue increasing at a low-30% rate year over year and gross profit climbing at a high-20% rate.
This guidance suggests that Shopify expects its strong growth momentum to continue through the holiday shopping period. Meanwhile, its expanding merchant solutions business and integrated commerce platform could help it benefit from increased shopping activity across online and physical retail channels.
That said, investors shouldn’t completely ignore the risks. Shopify’s massive market valuation doesn’t leave much room for disappointing results, while uncertain consumer spending trends due to economic uncertainties could affect merchant activity.
That said, instead of rushing to sell after its recent 8% post-earnings plunge, I’d prefer to hold existing shares and consider buying more on any upcoming dips. For patient investors, Shopify’s solid fundamentals and growth efforts could continue to back its growth well beyond the holiday shopping season.
