Shopify's (SHOP -0.84%) stock plunged 16% after it posted its fourth-quarter earnings report on Feb. 16. That slide continued the following day and extended Shopify's year-to-date decline to more than 50%.

That drawdown has erased most of the stock's gains since the onset of the pandemic in early 2020. But does that painful pullback represent a good buying opportunity for investors who missed its previous rally?

A merchant gets ready to sell a pair of shoes online.

Image source: Getty Images.

Why did Shopify's stock rally in 2020 and 2021?

Shopify's e-commerce services enable businesses to set up their own online stores, process payments, fulfill orders, manage marketing campaigns, and more. Those options are attractive to smaller merchants who don't want to join a crowded third-party marketplace like Amazon, Etsy, or eBay.

Shopify was already growing rapidly before the pandemic started, but its growth in revenue, gross merchandise volume (GMV), and gross payment volume (GPV) all accelerated significantly throughout the pandemic as businesses scrambled to sell more products online.

But as the lockdown measures were relaxed, Shopify's growth decelerated against some very difficult year-over-year comparisons to 2020:

Growth (YOY)

FY 2019

FY 2020

FY 2021

Revenue

47%

86%

57%

GMV

49%

96%

47%

GPV

55%

110%

59%

Data source: Shopify. YOY = year over year.

That slowdown will continue in 2022

Shopify didn't provide an exact revenue forecast for 2022 during its fourth-quarter report, but it said it would be "lower than the 57% revenue growth achieved in 2021, but still rapid and outpacing the growth of e-commerce."

Shopify also said its year-over-year revenue growth would likely be slower in the first quarter of 2022 as it laps the "COVID-triggered acceleration of e-commerce in the first half 2021." Those statements were a bit vague, but analysts expect Shopify's revenue to rise 32% in 2022 and 33% in 2023.

Shopify's stock is still richly valued

Based on those expectations and its current price of $660 per share, Shopify trades at 14 times its 2022 sales. That price-to-sales ratio might seem reasonable, but a lot of other high-growth tech stocks with comparable revenue growth are trading at even lower valuations.

For example, Twilio (TWLO 1.34%) -- the cloud communications company that expects to generate at least 30% organic revenue growth for the "next several years" -- trades at just eight times this year's sales. MercadoLibre (MELI -0.37%) -- the Latin American e-commerce giant that analysts have pegged to generate 35% revenue growth in 2022 -- trades at less than six times that estimate. Based on those comparisons, Shopify's stock could still easily drop another 50% before it's considered cheap.

Shopify's margins could decline in 2022

Shopify's adjusted gross and operating margins both expanded in 2021. Its adjusted operating margin has also improved significantly over the past three years, even as it ramped up its investments to expand its ecosystem.

Period

FY 2019

FY 2020

FY 2021

Adjusted gross margin

55.7%

53.5%

54.4%

Adjusted operating margin

2.9%

14.9%

15.6%

Data source: Shopify.

However, analysts expect Shopify's adjusted operating margin to drop to 7.5% in 2022 as its rising investments coincide with its slower revenue growth. Looking ahead, the company says it plans to reinvest "all" of its gross profits back into its international expansion, integrated point-of-sale systems, consumer-facing Shop App, and the Shopify Fulfillment Network.

As a result, analysts expect it to turn unprofitable on the basis of generally accepted accounting principles (GAAP) again in 2022 and 2023. All that red ink could make Shopify a risky stock to hold as interest rates rise.

Don't pay the wrong price for the right company

I won't discourage investors from nibbling on Shopify at these levels, since it looks a lot more reasonably priced than it did at the end of 2021.

But a simple comparison against its peers with similar growth rates indicates it could drop a lot further before it bottoms out. Therefore, I think it's better to raise more cash and wait for a better buying opportunity down the road -- preferably when its price-to-sales ratio hits the high single digits.