Shopify (SHOP -2.04%) remains one of the worst-performing stocks in the tech sector. Shares are down over 65% in 2022, have tumbled 73% from the all-time high hit last November, and they've lost 20% over the past week alone.
Despite some serious long-term growth opportunities, the e-commerce platform provider continues the long, steady decline that not even announcing it would be splitting its shares could stop for very long.
Is there still something fundamentally wrong with Shopify, or is the e-commerce platform provider a buy at these discounted prices? Let's dig in.
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Making the most of a bad situation
Shopify has become the cost-effective, go-to platform for anyone wanting to establish an e-commerce presence. Providing an entrepreneur with an easy way to monetize their website, Shopify quickly grew throughout the pandemic as locked-down individuals struck out on their own to create their own businesses.
Yet it's also the reason Shopify's stock is falling. The market has turned against it because the stellar growth it achieved by providing back-end solutions to so many people during the depths of the COVID outbreak is now expected to slow dramatically with a reopened economy. Even Shopify admits it.
During its fourth-quarter earnings conference call, CFO Amy Shapero told analysts that last year's first quarter was the single greatest period for growth in the company's history, with revenue surging 110% year over year. Lockdowns, coupled with the government handing out stimulus checks, makes it impossible to match the growth the company enjoyed.
Moreover, Shopify eliminated the revenue-sharing component for app and theme developers for the websites they help entrepreneurs create. It used to be Shopify took a percentage of developers' first $1 million in revenue, but that's gone now, though it does make the company more attractive to developers.
It will also result in more revenue coming from its merchant solutions business than its subscription solutions one, which means gross profit dollar growth will trail revenue growth. But it also means more merchants will be joining the platform and using more of its services as it becomes more vertically integrated.
Image source: Getty Images.
Changing its business for the better
Shopify has a lot of new irons in the fire, launching merchant money management accounts, a small business loan boutique, and a fully hosted enterprise e-commerce platform for fast-growing brands. It will offer non-fungible tokens, or NFTs, to help businesses and brands better connect with customers and is building out more warehouses so that products can be delivered to customers faster.
All of that will have the effect of lowering first-half -- particularly first-quarter -- results compared to last year until it laps those events and the new strategies it's implemented begin to ramp up in the back half of 2022.
While that could see Shopify's stock experience additional weakness, investors should view it as a buying opportunity. Growth might be slowing compared to record results it posted, but the e-commerce platform provider is still growing, and fabulously so.
Fourth-quarter revenue north of $1.3 billion was 41% greater than the year-ago quarter and was 173% more than it reported in 2019, when revenue grew to $505 million, a 47% year-over-year increase. So while Shopify expects the first quarter to be lower than last year (which was up 57% at the time), it anticipates fourth-quarter sales to be higher.
Image source: Getty Images.
Price is what you pay, value is what you get
Those remain phenomenal growth rates, and even Wall Street sees tremendous potential here. Revenue is expected to more than triple to over $18.7 billion by 2026, with profits forecasts to rise eightfold to well over $22 per share.
That doesn't make its stock look discounted today by traditional metrics such as price-to-earnings, sales, and the free cash flow it produces, where it goes for 21, 13, and 139 times, respectively, but this is a business still in its early stages of growth. Any chance investors have to scoop up what is really a cheap tech stock based on the market expecting the worst from it ought to be seen as a moment not to be missed.
