What happened
Shares of e-commerce technology-darling Shopify (SHOP 4.90%) were down 7.6% today as of 11:50 a.m. ET. The broader market indices had clawed back steep early losses, but no such luck for Shopify, as richly valued names continue to get punished. The stock is now over 40% off its all-time high reached just a couple of months ago.
Image source: Getty Images.
So what
The drop is particularly confounding because Shopify just inked a deal with Chinese e-commerce giant JD.com (JD 2.08%). Under the terms of the agreement, JD will allow merchants to set up a web presence on their platform using Shopify's software. JD will handle currency exchanges and the shipping logistics once a sale is made.
Getting access to China's massive and fast-growing middle class (total population in China -- 1.4 billion) is a big deal for any company outside of the Middle Kingdom, so Shopify has a lot to gain from this partnership. Nevertheless, e-commerce growth is slowing as the pandemic wears on, so worry continues to set in that Shopify won't be able to post enough growth to justify its sky-high valuation.
Even after the steep drop in recent months, shares are valued at nearly 29 trailing-12-month sales and over 260 times free cash flow (although profitability metrics aren't the primary concern for Shopify right at the moment -- all-out revenue growth is).
Now what
Shopify still can't be regarded as cheap, but for investors eyeing the company's longer-term prospects, now might be the time to start nibbling again. After all, even before the JD.com news broke, management was still forecasting strong growth for the holiday shopping season and beyond. The average Wall Street analyst is expecting some 60% year-over-year increase in Q4 2021 revenue to over $1.6 billion.
Shopify will likely report on full-year 2021 earnings in February.
