Shopify stock price pulled back for two consecutive weeks, ending the week at $118.60, down by nearly 10% from its highest point in July. It remains 410% above the lowest level since October 2022. So, is the Canadian e-commerce giant a good buy as it forms a double-top pattern after earnings?
Shopify earnings ahead
Shopify, the second-biggest Canadian company after Royal Bank of Canada (RBC), is a major firm offering software for e-commerce companies. Its platform enables companies of all sizes to build their e-commerce platforms.
Shopify’s business has been in a strong growth in the past few years as most companies have embraced e-commerce. Data shows that its annual revenue jumped from over $2.9 billion in December 2020 to over $8.8 billion last year.
Shopify has grown as the number of companies using its services has jumped over time. It is also benefiting from the fact that it has added more solutions to its platform over time. For example, it has become a major fintech player due to its payment processing capabilities.
The most recent results showed that Shopify’s business continued growing in the first quarter. Its revenue rallied by over 23% in Q1 to over $2.36 billion as its gross merchandise volume (GMV) jumped to $74.75 billion.
Shopify’s operating income rose to $203 million, while the free cash flow jumped from $232 million in Q1’24 to $363 million.
Analysts are optimistic that Shopify will publish strong financial results on Tuesday. The average estimate is that the second quarter revenue will come in at $2.55 billion, up by 24.56% from the same quarter last year. The most optimistic analyst see the revenue rising to $2.58 billion.
Third quarter guidance and valuation
The other key catalyst for the company will be its third-quarter forecast. Analysts expect the results to show that its revenue will be $2.63 billion in the third quarter, up 21.74% from last quarter.
If this trend continues, it means that Shopify’s revenue will be $11 billion this year, followed by $13.1 billion in 2026.
The company’s profits are expected to continue rising this year, with the second-quarter figure projected to be 29 cents, up from the same period last year.
A common concern about Shopify is that its business has become highly overvalued as it has a forward P/E ratio of 85, higher than the sector median of 23. Its valuation multiple is also higher than other companies like NVIDIA and Microsoft.
The rule-of-40 is one of the best valuation metrics for a SaaS company like Shopiy. In this case, the company’s annual growth rate is about 20%, while the net income margin is 17.7%. This means that its rule-of-40 metric is about 37%, making it a bit expensive.
Shopify stock price analysis
The daily chart shows that the SHOP stock price has been in a bullish trend in the past few months, as we predicted here. It has jumped from a low of $23 in 2022 to a high of $129.39. It has formed a highly bearish double-top pattern at $129.39 and a neckline at $70.10.
Shopify stock price also remains above the 50-week and 100-week moving averages. Therefore, the stock is likely to pull back due to mean reversion, a situation where an asset returns to its historical averages.
If this happens, the Shopify stock may crash to the 50-week moving average at $100, and then resume the uptrend.
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