Shopify and 5 Other Stocks That Aren’t as Cheap as They Look

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As stocks tumble, investors need to know how GAAP earnings can reveal flaws in seemingly attractive companies, such as Lyft.

David Paul Morris/Bloomberg

Stocks are falling and bargains abound, if you know where to look. But buying the downside doesn’t work in a bear market, nor does simply picking up battered company stocks. In fact, it may be a recipe for more losses because, again, what works when stocks go up doesn’t work when they go down.

Take the winnings. In a bull market, especially when fueled by the Federal Reserve pumping money into the economy, it usually doesn’t matter what kind of numbers a company releases. If the company “beats”, the stock usually goes up.

When stocks fall, however, there’s only one type of earnings that succeeds: those based on generally accepted accounting principles, or GAAP. “For the past few years, you could have overlooked accounting, financial statements or anything else and it didn’t matter,” says Chris Senyek, chief investment strategist at Wolfe Research. “Now, with the Fed’s liquidity depleted and interest rates rising, we’re back to basics: balance sheets, cash flow, and reading annual reports.”

Large discrepancies between operating profits and GAAP earnings could be a sign that a company is not doing as well as it says. These variances may be due to factors ranging from acquisitions, restructuring charges, and the use of stock-based compensation such as restricted stock units and options granted to employees and officers in lieu of cash. . The latter, in particular, can skew earnings in ways that can lead to huge differences between GAAP and adjusted numbers.

Admittedly, stock-based compounding works very well in a rising market. While this dilutes shareholders, it encourages employees to stick around – and since the stock goes up, everyone benefits. But when stocks fall, companies feel compelled to reprice options, award even more shares, or pay more money. “It will increase their cost structure,” says Senyek.

Here are six stocks that have fallen sharply this year but, due to high levels of stock mix, aren’t as cheap as they look.

CrowdStrike Holdings

Company / Symbol Recent Price Change since the beginning of the year 2023E P/E 2023E GAAP P/E
CrowdStrike Holdings / CRWD $142.64 -30.3% 90.3 N / A

E=estimated, N/A=not applicable

Source: FactSet

Cybersecurity technology company CrowdStrike Holdings (ticker: CRWD) is growing rapidly – its earnings could rise 66% in fiscal 2023 – fast enough, perhaps, to convince some investors to ignore the fact that ‘it’s trading at 90 times 2023 earnings estimates. But CrowdStrike paid out $310 million in stock-based compensation in fiscal 2022. Convert that to cash compensation and it would eat up about 70% of $442 million in cash flow generated by CrowdStrike in fiscal 2022, while reported profits would turn into losses. CrowdStrike could save you from a cyberattack; don’t count on it to save your wallet right now.

Snowflake

Company / Symbol Recent Price Change since the beginning of the year 2023E P/E 2023E GAAP P/E
Snowflake / SNOW 146.82 -56.7 341.4 N / A

E=estimated, N/A=not applicable

Source: FactSet

Snowflake (SNOW), a fast-growing cloud-based data and analytics products provider, is expected to earn 16 cents per share this fiscal year, its largest since its spectacular IPO in 2020. This may seem like a sign that it’s time for investors to learn about the badly beaten stock. Snowflake’s GAAP earnings, however, aren’t quite as rosy: They posted a loss of $2.22 per share, turning its price-to-earnings ratio from more than 900 times to non-existent. Again, the gap between the two figures is the result of abundant stock-based compensation, which equates to roughly half of Snowflake’s sales over the past two years.

Shopify

Company / Symbol Recent Price Change since the beginning of the year 2023E P/E 2023E GAAP P/E
Shopify / SHOP 391.33 -71.6 185.5 N / A

E=estimated, N/A=not applicable

Source: FactSet

Shopify (SHOP) was an e-commerce darling in 2020 and 2021, with shares soaring nearly 250% amid pandemic shutdowns. Today, the stock is trading around its starting point in 2020. An opportunity for investors looking for bargains? Not enough. Shopify is trading at 185 times 2023 earnings estimates of $2.11, but stock-based compensation was around 10% of first-quarter sales. It may not sound like a lot, but when added to the financial results, the profits turn into losses. Shopify now allows employees to choose between stock and cash compensation. If employees opt for cash, it becomes an expense that will show up regardless of which revenue measure you use.

Z-scale

Company / Symbol Recent Price Change since the beginning of the year 2023E P/E 2023E GAAP P/E
Z/ZS Scale 132.30 -58.8 115.0 N / A

E=estimated, N/A=not applicable

Source: FactSet

With stock compensation of $104 million in the second fiscal quarter, or about 41% of sales, Zscaler (ZS), which develops cloud-based security software, is one of the biggest users of options and shares on Senyek’s list. If stock-based compensation were cash, Zscaler’s quarterly free cash flow would drop from $29 million to a loss of $75 million. Its P/E would drop from over 230 times to, well, nothing, as GAAP earnings would show a loss of $2.57. Zscaler is one of the companies with the highest level of equity compensation on Senyek’s list. Even down 59% in 2022, the stock is not a bargain.

Lyft

Company / Symbol Recent Price Change since the beginning of the year 2023E P/E 2023E GAAP P/E
Lyft / LYFT 19.29 -54.9 20.7 N / A

E=estimated, N/A=not applicable

Source: FactSet

Lyft (LYFT) stock plunged 55% in 2022, making it look a lot cheaper than it did a short time ago. Shares are trading at about nine times estimated 2023 earnings before interest, tax, depreciation and amortization, or Ebitda, compared to 26 times at the start of 2022. With the


S&P500

trading at around 12 times estimated Ebitda, which makes Lyft almost seem like a value game. But stock-based compensation accounts for 18% of Lyft’s first-quarter sales. Roll that back, and 2023 Ebitda would be closer to minus $360 million instead of the ~$600 million profit analysts predicted. Lyft can get you from point A to point B. Don’t think of its stock as value.

PayPal

Company / Symbol Recent Price Change since the beginning of the year 2023E P/E 2023E GAAP P/E
PayPal / PYPL funds 81.28 -56.9 16.7 25.3

E=estimate

Source: FactSet

PayPal Credits

(PYPL) is down around 57% year-to-date and now trades at around 17x estimated 2023 earnings. This is a lower multiple than the market for a tech company established financial institution, which is expected to increase its profits by around 25%. Sounds like a good deal, except that stock-based compensation only accounted for 7% of PayPal’s first-quarter sales. While that might sound low, adding compensation to the numbers would mean earnings would be closer to $3.21 per share, rather than $4.86 per share. PayPal shares would trade at 25 times the unadjusted number, which is not attractive enough to consider the shares as a value.

Write to Al Root at allen.root@dowjones.com

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