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Why Shopify Stock Fell 11% in September

By Jennifer Saibil – Oct 4, 2021 at 10:01AM

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The e-commerce leader's shares have come down from an extremely high valuation. That could be a good thing.

What happened

Shares of e-commerce giant Shopify (SHOP -4.46%) dropped by 11% in September, according to data provided by S&P Global Market Intelligence. That was a continuation of a downward trend that began in July, when Shopify shares hit a record peak and were trading at sky-high valuations. There was no bad news for the company -- indeed, it recently announced some positive developments. Nonetheless, investors seemed to think it was too highly valued.

A group of people sitting together around a laptop computer.

Image source: Getty Images.

So what

Shopify has posted phenomenal growth for years, and that continued with the second-quarter report it delivered in July. Sales increased 57% year over year to top $1 billion for the first time, gross merchandise volume increased 40% year over year for a record $42 billion, and net income zoomed up by more than 2,000% from $36 million to $879 million. Still, the stock began to slip that month.

In August, the e-commerce leader, which provides full-scale, customizable, pre-fab "storefronts" for online businesses, announced a new partnership with video social network TikTok for clients to offer a shopping tab on their TikTok accounts. It has also partnered with "buy now, pay later" company Affirm Holdings to offer its services through its merchant accounts, and it rolled out major platform upgrades over the summer.

Management said it expects growth for the rest of the year will be slower than it was in 2020, but still be robust, and that shouldn't scare investors. People are back to in-store shopping, and that might affect Shopify in the short term, but there are so many reasons to be confident in its future. The company sees a $153 billion total addressable market, and it came in second, only behind Amazon, in 2020 e-commerce market share, according to eMarketer.

Now what

Shopify stock has risen by more than 3,000% over the past five years, and it was trading at around 800 times trailing 12-month earnings in January. That's super-high even for a growth company. It's now up 20% year to date and trading at a price-to-earnings ratio of 70, which is an attractive valuation for a company of its caliber. With its ample growth prospects and history of success, investors may want to buy shares at their newly lowered price.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Affirm Holdings, Inc., Amazon, and Shopify. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

Stocks Mentioned

Shopify Stock Quote
$38.97 (-4.46%) $-1.82 Stock Quote
$88.25 (-3.03%) $-2.76
Affirm Stock Quote
$11.96 (-7.96%) $-1.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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