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All eyes were on Shopify (NYSE: SHOP) last week as it reported its first-quarter earnings results. With the stock up over 120% in the lead-up to the earnings release, investors had high expectations, so its weak outlook was met with severe consequences. Shopify stock has plunged 24% since then.

Is this short-term dip a buying opportunity? Let’s see how Shopify is doing and where it’s likely headed.

An e-commerce empire

Shopify is a global leader in e-commerce software, and its platform accounted for 28% of the U.S. market as of 2023. It has millions of customers that rely on it to operate their online businesses, and it has expanded in several important directions.

For example, it now offers individual services such as payment processing tools or cross-border commerce solutions to companies that don’t need the whole platform.

That’s related to the second big move: Shopify is extending its reach beyond small businesses to large enterprises, including names like Tapestry‘s Coach and Beyond‘s

Payment processing is becoming a large part of the business model too. Its Shop Pay option, which competes with Alphabet‘s Google Pay, makes it easy to pay with a click and even choose a buy now, pay later schedule.

Reported under its merchant solutions revenue, payment processing makes up a significant portion of Shopify’s revenue, and it continues to grow at a steady pace. First-quarter gross payment volume (GPV) increased 60% year over year, and Shop Pay accounted for 39% of GPV.

Shopify is also growing its top line through a focus on international business and an in-store presence, evolving from an acute e-commerce focus to a total retail specialist.

Business is booming … for now

First-quarter results were strong across the board. Revenue increased 23% year over year to $1.9 billion. Gross profit increased 33% to $957 million as gross margin expanded from 47.5% to 51.4%.

Free cash flow nearly tripled to $232 million, and operating income of $86 million reversed the year-ago loss of $193 million.

Shopify is still having profitability issues it’s trying to get under control. The company overextended itself during the pandemic before announcing large-scale layoffs, like many other companies. And it’s still absorbing the impact of selling off its logistics business.

Net income was a loss in the first quarter, but adjusted earnings per share (EPS) — exclusive of the impairment related to the logistics business and other adjustments — was $0.20, beating Wall Street’s $0.17 consensus.

However, analysts were disappointed with second-quarter guidance, which called for a sequential drop in gross margin.

Management expects revenue to increase at a high teens rate, in line with Wall Street’s consensus but still a deceleration from last quarter.

Is Shopify stock a bargain or a bust?

Shopify stock was especially susceptible to a post-earnings sell-off because of its expensive valuation, though it has pulled back from 13.6 times trailing-12-month sales to 10.2. There are still high expectations built into that valuation, and the company has little leeway to underwhelm investors.

So is it a bargain now? I find it hard to call a double-digit price-to-sales (P/S) ratio a bargain at any growth rate but certainly not at the rate Shopify is growing. There are other companies growing faster while also reporting a profit. Consider MercadoLibre stock, which trades at a P/S ratio of just 5.5.

Management laid out a compelling growth path at its 2023 investor day, and Shopify looks like it still has an incredible opportunity ahead of it. But at this valuation, it’s susceptible to exactly the kind of reaction it got after last week’s report. Investors should keep Shopify on a watch list for now.

Should you invest $1,000 in Shopify right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jennifer Saibil has positions in MercadoLibre. The Motley Fool has positions in and recommends Alphabet, MercadoLibre, and Shopify. The Motley Fool recommends Beyond, Inc. and Tapestry. The Motley Fool has a disclosure policy.

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