Shopify (SHOP -0.38%) stock cratered on Wednesday, tumbling as much as 19%, driven lower by management commentary included in the company's fourth-quarter financial report. The missive confirmed what many had long suspected -- that the rapid pace of e-commerce adoption would decelerate.
In a case like this, however, context matters. The company provided guidance for 2022 only in the broadest sense of the word, saying it expects "year-over-year revenue growth to be lower in the first quarter of 2022 and highest in the fourth quarter of 2022."
What appeared to send investors running for the exits was the pronouncement that Shopify didn't expect the "COVID-triggered acceleration of e-commerce" to continue this year, which shouldn't come as a surprise to anyone.
On a positive note, management signaled that some of the pandemic-related changes will continue (emphasis mine). "We believe that changed behaviors adopted by merchants and consumers in 2020 and 2021 driven by COVID have significantly expanded the prospects for entrepreneurship and digital commerce," the company said in its earnings report. This will benefit Shopify and its shareholders over the long term.
The commentary went on to remind investors that since the end of 2019, revenue and gross merchandise volume (GMV) -- or the value of products sold on its platform -- had doubled, as had the number of merchants that use Shopify's platform. That performance makes for tough comparisons, at least over the short term.
It's important to put these developments in historical context.
While estimates vary, e-commerce sales in the U.S. grew by 19% and 25%, respectively, in 2020 and 2021, spurred on by pandemic-related restrictions and lockdowns. At the same time, Shopify's revenue grew 86% and 57%, respectively, over the past two years. This shows that Shopify is the top choice for merchants looking to sell their goods online and its growth will likely continue to outpace e-commerce adoption overall.
It wasn't realistic to expect that online retail would continue to grow at the blistering pace we'd seen over the past two years. That said, e-commerce adoption will continue, with an estimated compound annual growth rate of 13.5% through 2025.
This data suggests that the secular tailwinds that have driven Shopify will continue, albeit at a slower pace.
Simply put, the selling is overdone and investors who buy Shopify stock now will be glad they did.