The e-commerce industry has been one of the groups of stocks hit hardest by inflation concerns. Many investors believe that with inflation on the rise, consumers will spend less on non-necessary goods -- ones that you might buy on e-commerce websites.
Shopify (SHOP 4.90%) has been one of the stocks crushed by these fears. Partially driven by a concerning quarter, Shopify shares are down more than 60% from their all-time highs, and are trading at prices not seen since early 2020. Despite some rough news in this quarter, though, Shopify still looks like an incredibly strong business for the long-term. Investors shouldn't be concerned about the business right now, and it might even be an opportunity to buy the dip.
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Why the stock sunk
If there is one thing that will spook investors out of a stock, it is the potential for slowing growth and low guidance. The company reported both of these, and that sent many investors fleeing for the exits. Revenue grew 41% year-over-year (YOY) in Q4 to $1.38 billion; that was the slowest growth rate of the past four years. This was weighed down by 26% YOY growth in its subscription solutions, which is the higher margin part of its business. The company also forecasted that its full-year 2022 revenue growth would be slower than the 57% rate in 2021.
With lackluster growth in the company's high-margin business, its profitability also took a hit. This was also affected by a loss of $503 million in one of its investment stakes in a smaller e-commerce company -- Global-E Online (GLBE 3.82%) -- which fell 51% from its highs in September 2021. This loss, combined with lower margins, resulted in a Q4 loss of $374 million compared to a $113 million net profit in the year-ago period.
Slowing growth and a turn to unprofitability did not look good, and considering that Shopify shares were valued at very high levels of 24 times sales going into earnings, investors were expecting continued growth. When Shopify did not pull through, investors pulled back the premium they would be willing to pay, sending the stock down extra hard. Now it trades at 18 times sales.
A growing dominant brand
Shopify might be seeing slowing growth simply because of how big it already is. The company has millions of merchants on its platform, and in Q4 alone Shopify powered over $54 billion in transaction volume. As a result, the company estimates that it powers over 10% of the U.S. e-commerce market.
The company's market opportunity isn't fixed either; rather, it is expanding rapidly. The company estimates that its addressable opportunity to help small and medium-sized businesses (SMBs) establish, grow, and operate their businesses is worth $160 billion today.
One way the company is looking to continue growing rapidly is by expanding into China. The company partnered with one of China's biggest e-commerce brands -- JD.com (JD 2.08%) -- to allow Shopify merchants to sell products in China. Additionally, Shopify's investment in Global-E also allows merchants to use its services, which makes it easier for companies to expand internationally by breaking down international payment, logistics, and language barriers.
Investing like a small-cap
Shopify isn't just resting on its laurels and hoping that these international expansion efforts will be enough to continue succeeding. The company is investing heavily in new products to make its platform even more sticky for its merchants. One of them is Shopify Fulfillment, which will pick, pack, and ship products on behalf of its SMB merchants. It only recently moved out of the prototype phase, so it is still in its early days. But once it becomes fully scaled, it will be able to deliver packages in two days or less to 90% of the U.S. Shopify has spent $117 million to begin building it and expects to spend another $880 million or more before it comes to fruition in late 2023.
This is not the only product that Shopify has in its long-term plan to increase the value of its service. The goal of these investments is to continue to make Shopify a no-brainer decision when SMBs are looking to grow. The company will be investing heavily into these projects -- and if they pay off, Shopify could see sustained adoption and growth for years to come.
Growth might be slower from here on out as Shopify faces short-term headwinds, but I could see a steady expansion over the next decade as the company continues to invest in its business, which could still make shareholders incredibly happy. At these low prices, I think Shopify is worth buying the dip if you plan to hold this company for several years.
