The stock market has gone a bit mad recently in the wake of 40-year-high inflation levels, plans for a string of interest rate hikes by the Federal Reserve, and global economic impacts from Russia's war against Ukraine.
As a result, shares of many of the world's most innovative companies in some of the fastest-growing industries have been shattered. The market is currently moving on sentiment and is paying no mind to fundamentals. As prudent investors, we can take advantage of the present situation by purchasing shares of financially sound companies that now carry attractively low valuations.
One of those companies, Shopify (SHOP -4.85%), is a global leader in e-commerce and enjoys a long runway for growth moving forward. Shares of the stock have tanked 75% in six months, despite delivering an exceptional outing in 2021 and bearing a promising growth outlook in the years ahead.
Is it time to go against the tide and buy shares of the e-commerce juggernaut today? Let's take a closer look.
A deep dive into Shopify's financials
Shopify stock is down nearly 30% since reporting underwhelming first-quarter results on May 5. The e-commerce company delivered revenue of $1.2 billion, missing consensus estimates by 3%, and its earnings per share of $0.25 drastically failed to meet Wall Street's $0.87 expectations. The weaker-than-anticipated outcome came after the company experienced a robust 57% and 61% increase in sales and earnings, respectively, in its fiscal 2021.
COVID-19 led to inflated growth for the e-commerce stock as business owners relied on its services to grow and manage their companies during shutdowns. The economic reopening, coupled with changes in consumer spending due to inflationary pressures, may now slow Shopify's growth throughout 2022.
Total revenue increased 22% year over year in the first quarter, and although that is significantly lower than the 110% growth it experienced a year ago, it is surely nothing to panic about. Plus, it's not a fair one-to-one comparison given that first-quarter 2021 metrics were exaggerated due to pandemic lockdowns and the government stimulus. And because more merchants joined the platform in the first quarter, monthly recurring revenue (MRR) rose 17% to $105.2 million.
Let's take a step back for a moment and look at the big picture. Shopify dominates nearly one-third of the e-commerce platform market in the United States, with competitors WooCommerce Checkout and Wix.com serving as distant runners-up. Fortunately, the company leads the way in an industry boasting $160 billion of market potential, and it has only captured 3% of the revenue opportunity.
Short-term noise surrounding Shopify's business may govern its share price movement for the foreseeable future, but it's quite clear that the company enjoys an enormous runway for growth over the long run.
How about Shopify's valuation?
Shares of the e-commerce titan are becoming more attractive by the day. The company is currently trading at less than 10 times sales, representing a notable discount to its five-year average price-to-sales multiple of 32.7.
Not only that, but Shopify's valuation is the lowest it has been in three years, even with the monstrous progress it achieved since the start of the pandemic. It's not unreasonable for a stock's valuation to contract when its growth declines, but given the company's opportunity for growth in the future, its share price is looking incredibly enticing at the moment.
Shopify is built for long-term success
It's important not to lose sight of Shopify's future potential in the midst of the stock market's chaos today. As management indicated in its earnings call to close out 2021, investors should expect the company to experience some growing pains throughout the course of the year. That said, the e-commerce leader is well equipped to overcome near-term challenges and flourish in the long run. Investors with long-term horizons shouldn't hesitate to check this stock out today.