Shopify (SHOP 1.11%) was a massive beneficiary of the coronavirus pandemic. Government-mandated closures of nonessential businesses for in-person shopping boosted e-commerce spending. As a result, companies that previously neglected developing an online presence were forced to do so if they wanted to generate sales.
The development is unlikely to reverse. Businesses will not likely cancel or shut down the websites and apps they paid to create during the pandemic. The more extensive customer base could be a green flag for Shopify this year.
Meanwhile, the company, realizing the needs of its client base has grown substantially since the pandemic onset, is investing aggressively to serve those needs. The acceleration of capital investments and expenses that it will require could be a headwind for Shopify in 2022. Already, investors have signaled that the red flags for Shopify outweigh the green flags, and the stock is down 56% so far in the year.
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The green flag: A more significant customer base
For more than two decades, consumers have been allocating more spending online. The shift helped Shopify expand from $24 million in revenue in 2012 to $1.6 billion in 2019. Shopify is one of the leading providers of internet solutions for entrepreneurs of small and large businesses alike. Unsurprisingly, the pandemic put fuel on the fire, and revenue nearly tripled for Shopify from $1.6 billion in 2019 to $4.6 billion in 2021.
The company offers an introductory subscription to start a website that costs as little as $50 per month and premium services and solutions for businesses as they scale to become more prominent. As of Dec. 31, it boasted 2.1 million merchant customers. As these companies grow, they will require more services to help with the complexities of an expanding operation. Shopify stands ready to serve the needs with its host of services capable of meeting the needs of businesses as large as Netflix, which it claims as one of its customers.
Historically, Shopify has earned more revenue from merchants that sign up each year they remain a customer. If that pattern continues, the cohorts that signed up during the pandemic will contribute a more significant amount of revenue in 2022 and in the years to follow, a green flag to be sure.
The red flag: Rising expenses
The significant rise in e-commerce spending overall and its customer acquisition during the pandemic convinced management of the greater need for entrepreneurs. If consumers are spending more money online, businesses need the solutions that support their ability to handle the increase. Things like shipping and handling, payment processing, email marketing, website design, app development, and the integration of online and physical shopping are all taking on greater importance for companies since the start of the pandemic.
Management anticipates that these trends are unlikely to reverse and is investing significantly to meet the ever-growing needs of businesses worldwide. In discussing the outlook for 2022, Shopify said, "To keep independent brands at the forefront of this revolution, Shopify intends to reinvest back into our business aggressively throughout 2022, deploying all of our gross profit dollars back into the business."
The surge in revenue resulting from the pandemic had boosted Shopify's cash flow from operations. The announcement of the company's reinvestment plans for 2022 spooked investors and could partly explain the fall in the stock price in 2022.
SHOP Cash from Operations (TTM) data by YCharts
Nevertheless, Shopify's operating expenses in 2021 totaled $2.2 billion, and it earned a gross profit of $2.5 billion. Hence, the increase in spending all gross profit dollars is a relatively small rise of $300 million, all else held equal. The resulting panic and sell-off of Shopify stock appear to be an opportunity for long-term investors willing to hold on to shares through Shopify's investment cycle.
