Investors are sorting through a lot of information right now to try to make an educated guess about what the future holds. Of course, predicting the future is impossible. But data can help create an educated guess. Even that task is complicated by the anomaly of the past two years. Economic data has been warped in some ways by the rapid shift to internet-based businesses.
That's where Shopify (SHOP 2.34%) shareholders find themselves as the company prepares to report earnings in mid-February. The provider of e-commerce solutions for merchants has been a big winner for many. Despite having risen almost 1,600% over the past five years, the stock is down almost 50% since November. There's good reason. And these charts show why it could get worse.
A victim of its own success
Shopify has delivered remarkable growth since going public in 2015. Revenue has grown almost 1,000% in just the past five years. That's a testament to the company's expanding role in e-commerce. And Wall Street has come to expect that type of performance. It's why the stock traded with a price-to-sales (PS) ratio over 50 just before Thanksgiving.
But there are a couple of important metrics that are trending in the wrong direction. They could hold the key for investors trying to decide if the company still deserves its rich valuation.
The last quarter confirmed an ugly trend
One of those metrics is gross merchandise volume (GMV). Management defines it as the total order dollars on its platform, net of refunds. The number includes shipping, duties, and taxes.
As you would expect, GMV has expanded rapidly over the years. It grew to $121.3 billion through the first three quarters of 2021, compared to only $17 billion for the same period in 2017. But the growth has been slowing. That's no surprise. It's what happens as any company gets larger.
Looking at year-over-year growth can sometimes obscure a significant shift in a trend. That's why it pays to calculate how fast a company is growing sequentially -- or quarter-over-quarter. From this view, Shopify has reached an inflection point. The rate of growth from Q2 to Q3 has been declining for several years. The most recent data shows it turning negative in 2021.
That's a big problem if it persists. And the sell-off may be partly driven by astute investors picking up on it. Those looking at year-over-year numbers for the third quarter still point to 35% growth in GMV. That is old news.
A potential saturation point
Another troublesome data point for Shopify is the number of referrals over the trailing 12 months. It has long been a source of pride for management that so many existing customers recruited new ones.
Once again the year-over-year metrics can be slow to spot changes. In the third quarter of 2021, the number of merchants referred by existing partners over the past 12 months climbed 15% compared to the same period a year earlier. But comparing the number to where it was at the end of 2020 -- the chart below -- shows growth of referrals has stalled, another red flag.
Separating the stock from the business
Shopify is still an amazing company playing an important role in helping businesses operate online stores. In fact, CEO Tobi Lütke is one of the most thoughtful founders around. And I believe he will deftly guide the company as it matures out of the hypergrowth phase.
That's different than whether the stock currently represents good value. A lot of growth was pulled forward during the pandemic and analysts still expect revenue to climb 33% this year. Based on the latest numbers, that target may be hard to reach. If upcoming guidance falls short, the stock may have further to fall as Wall Street reevaluates the long-term potential.