Stocks fluctuate for various causes, and you never know what exactly contributed to the cause. Nonetheless, when a bullish or bearish thesis plays out beautifully, at least some price movement may be attributed to it. We explained why the bulls were ready to be dragged out on a stretcher in our first standalone post on Shopify Inc. (NYSE:SHOP).
In our judgment, the COVID acceleration in e-commerce was a pull-forward of demand rather than a source of new demand. In other words, by the end of 2024, we will have returned to where SHOP revenues would have been in the absence of COVID-19. What does this have to do with the stock? Pre-COVID-19 We predicted 40% growth in 2020 and a 25% decrease by 2024. That would bring our total income to almost $8.0 billion. That’s a huge difference from where the consensus is.
Our prediction was very early in 2022 before the bubble burst. After that, Shopify purchased Deliverr, which obviously was not included in our predictions. According to management, Deliverr is expected to grow far faster than Shopify as a whole. Despite this, look at where the 2024 projections are going.
Why We Are Not Done Yet, Not Even Close to It
Bulls may scream, “What’s another $800 million among friends?” However, with a recession in the future, SHOP’s problems are going to worsen. We are about to be hammered by the combined pressures of recession and punishment for the move forward all at once. Even without the second issue, we expect growth to be less than 15%. Amazon Inc. (AMZN) was the fastest growing e-commerce company, but sales growth slowed to 14% amid the global financial crisis.
In 2001, growth slowed to a crawl and dipped to 0.22% year on year. Shopify is unique in many ways, yet this serves to exacerbate the situation. This time around, the corporation is expected to face significantly greater competition. Our revenue projections are as follows.
$5.2 billion in 2022
$5.7 billion in 2023
$6.2 billion in 2024.
These may appear speculative, but one expert has already forecasted $6.64 billion in sales for 2024, yet none of them, on average, successfully forecast recessions.
Shopify Valuation
Putting a price on a loser is a difficult task. That is something we willingly admit. However, as a general rule, these are severely underestimated when the damage is over. Please keep this in mind. With that said, we can make some educated guesses. Many models focus on price to sales (or EV to sales), which we believe is a smart one to follow. AMZN, our previous comparable, hit a low of 1X revenues in 2002. In 2009, a similar figure was recorded. If SHOP achieves the same level in 2023, we will still see a significant drop since it is now trading at a spectacular 8.6X sales.
Most analysts continue to use 6-7X sales multiples, which are comical if we do indeed enter a recession. That is why the price objectives are still sky high, and most have not given up. Another angle to consider is what they use to support their 6-7X revenue multiples for an unsuccessful firm. To justify a 7X revenue multiple, Toronto-Dominion Bank (TD) analysts utilize a long-term revenue growth rate of 30%-35% with an EBITDA margin of 20%-25%.
What’s strange about those figures is that revenue growth is falling far short, and EBITDA margins are minus 2.5% in Q2-2022. The road from negative 2.5% to positive 25% is long and difficult. Assuming Shopify can achieve 15% revenue growth and 10% EBITDA margins in 2023, their model would call for $5.35/share. Their model predicts that Shopify will grow faster (10% faster, or 40% faster) than its long-term growth rate in 2023-2026.
Verdict
SHOP is the highest conviction example that we believe investors should avoid. Like most epic bubbles, this huge bubble continues to attract dip buyers who believe the stock is suddenly “cheaper.” Investors who purchase now are expected to lose another 70% in our bull (yep, you read that correctly) scenario of a 3X sales multiple. We can’t dispute that it’s gone down, but we’re not yet done.
Featured Image: Megapixl @Wirulsos
