Earnings season continues to chug along, with a wide array of companies finally unveiling their quarterly results that investors have been waiting patiently for. Inflation, surging energy costs, supply-chain issues, and the conflict in Ukraine have weighed heavy on investors’ sentiment throughout the quarter, causing many companies to decline in valuation quite notably.

One company, in particular, that’s declined significantly throughout 2022 is Shopify (SHOP Quick QuoteSHOP - Free Report) . Shopify provides a multi-tenant, cloud-based, multi-channel e-commerce platform for small and medium-sized businesses. The chart below illustrates the year-to-date performance of SHOP shares while comparing the S&P 500.

Image Source: Zacks Investment Research

As we can see, it’s been a brutal year for Shopify shares, down nearly 70% just through 2022 and not even coming close to the S&P 500’s performance. When we stretch out the time frame to over the past year, we can see that shares took a downwards trajectory near the middle of November 2021. Before that, SHOP shares had a nice run throughout the majority of 2021.

Image Source: Zacks Investment Research

The company reports quarterly results on Thursday before the market opens, so let’s look at the forecast and how shares reacted to previous reports to get a clearer picture of where the company stands.

Previous Share Reactions

The stock has struggled to remain afloat and reclaim any significant uptrend. In its Q3 2021 report released in October, the company missed the Zacks Consensus Estimate by nearly 40% and missed revenue estimates by roughly 3%. This looked to be a tipping point for shares, as it was the first quarterly EPS and sales miss after a long consecutive streak of beating expectations.

In its Q4 2021 report, Shopify noted that COVID-19 vastly accelerated the growth of online shopping and is now expecting this trend to slow down considerably. Due to this, SHOP expects revenue growth for FY22 to grow slower than in FY21. This undoubtedly fueled the 26% slash in valuation following the report.

EPS Surprise

Image Source: Zacks Investment Research

Quarterly EPS & Revenue Estimates

For the report coming in hot on Thursday, the Zacks Consensus Estimate reflects a sizable 62% decrease in earnings from the year-ago quarter. Out of the seven analysts that have revised their quarterly estimates, four have lowered their Q1 outlook, causing the Consensus Estimate Trend to retrace nearly 5% from $0.81 per share down to $0.77 per share. Additionally, full-year earnings for FY22 are expected to shrink almost 53% year over year.

Q1 revenue is forecasted to grow from $988 million to $1.2 billion, a 25% increase from the year-ago quarter. Year-over-year revenue growth is expected to be lower in Q1 2022 and highest in Q4 2022, mainly attributed to the slowdown of the COVID-19 growth in e-commerce. Additionally, the company expects its Subscriptions Solutions revenue to be a headwind in the first half of 2022, attributed to a restructuring of contract terms with its partners.

Amazon Comparison

We can pivot to another e-commerce titan, Amazon (AMZN Quick QuoteAMZN - Free Report) , to better understand what to expect from SHOP. Amazon missed the Zacks Consensus EPS Estimate by a sizable 50% in its latest quarterly report and missed revenue expectations marginally. Like SHOP, Amazon enjoyed a robust holiday season, but the outlook has significantly shifted since then.

AMZN reported that the e-commerce boom was slowing down and that higher costs throughout the quarter were the main contributors to the disappointing revenue outlook. Additionally, the conflict in Ukraine had also negatively affected results.

This paints a pretty vivid picture; the breakneck growth and valuation skyrockets are no longer sustainable following the re-opening of the world, especially in the e-commerce space. SHOP has already noted that the growth slowdown in the e-commerce space is expected to impact its top line negatively.

Amazon shares are down nearly 25% year-to-date, with its latest EPS miss causing shares to retrace more than 10% following the report. If SHOP misses EPS estimates widely and further speaks on the slowdown in revenue growth, sentiment for the company’s future outlook will shift significantly. 

Bottom Line

Shopify will have to beat EPS and sales expectations quite considerably to impress the market. With the e-commerce market coming back down to earth following a surge attributed to the pandemic, things look a bit cloudy heading into Thursday morning.

SHOP has already noted a revenue growth slowdown in FY22 and will also be facing headwinds in the first half of the year due to restructuring its Subscription Solutions revenue. This, paired with the adverse price action in AMZN shares we witnessed following its quarterly report, makes it somewhat challenging to have an optimistic view heading into SHOP’s quarterly report.

The sell-off we’ve witnessed in SHOP’s shares most likely could’ve been foretold. At its all-time-highs of $1690, the company was screaming signs of being overvalued. The adverse price action has caused its forward price-to-sales ratio to retrace to 9.5, a fraction of its 58.2 high in July 2020 and well below its median of 22.7 over the last five years.

While the sell-off has been brutal, it has brought Shopify down to more reasonable valuation levels. I think investors should heed caution heading into the quarterly report and instead wait to see guidance moving forward; the e-commerce arena is in a rough spot. SHOP is a Zacks Rank #3 (Hold) with an overall VGM Score of an F.