Few software companies had a more positive impact on small businesses than Shopify (SHOP 1.23%) during the pandemic. As a result, Shopify's business grew, and its stock price rocketed up to nearly $1,700 in November 2021.
Now Shopify stock is trading at less than $400 per share, down more than 75% from its high. While this was disastrous for the stock, the company recently reported quarterly earnings that weren't nearly as bad as the stock price drop would seem to indicate. Shopify is giving investors plenty of reasons to stick around, as well as one possible reason to sell.
Image source: Getty Images.
Here's a look at the three reasons to buy.
1. Shopify is creating the industry's best toolkit
When trying to launch an online business, the one platform entrepreneurs typically flock to for help is Shopify. Shopify's tools allow its customers to process credit cards, manage inventory, and create a professional-looking e-commerce site starting at just $29 per month. It's not only for small businesses though as Shopify also has products for thriving enterprises like fulfillment centers and tools to sell internationally.
Shopify thrived during the pandemic, as many one-off brick-and-mortar stores needed to establish an online presence when customers could no longer shop in person. Now that most people are willing to shop in person again, Shopify's growth has slowed but is still strong. In its first-quarter report, Shopify's subscription solutions (which are primarily affected by more merchants joining the platform) grew by 8% year over year. In addition, merchant solutions (driven by gross merchandise volume, or GMV, growth) rose 29% year over year.
NASDAQ: SHOP
Key Data Points
This imbalance shows that e-commerce is still growing, but the number of merchants needing to establish an online presence is decreasing. Because Shopify derives most of its revenue from merchant solutions, overall Q1 revenue growth was 22% year over year, bringing quarterly revenue to $1.2 billion.
However, Shopify's expenses grew much faster than revenue, causing a bottom-line loss. Here's a look at Shopify's quarterly operating expense growth year over year.
| Business Segment | Q1 Operating Expense Growth (YOY) |
|---|---|
| Sales and Marketing | 63% |
| Research and Development | 73% |
| General and Administrative | 61% |
| Transaction and Loan Loss | 93% |
| Total Operating Expenses | 67% |
Data source: Shopify. YOY = year over year.
With a net operating loss of $98 million, Shopify will need to grow into its spending habits or cut expenses to become profitable again. However, Shopify's management isn't committed to becoming profitable. In the quarterly announcement, management reiterated its goal of "reinvesting all gross profit dollars back into the business to pursue our multiple paths to growth."
This path isn't bad for long-term investors, as they should be cheering Shopify on to create the best platform possible. The better Shopify's tools are, the less chance a new challenger can overtake it.
2. Shopify is increasing its logistics capabilities
Shopify's acquisition of Deliverr embodies this direction. Deliverr gives Shopify access to software that will allow its customers to manage their supply chains and deliver products faster to consumers. Shopify's CEO and co-founder Tobias Lütke stated, "Our goal is to not only level the playing field for independent businesses but tilt it in their favor -- turning their size and agility into a superpower."
By growing its logistics capabilities, Shopify is arming its customers with the tools necessary to compete against the two-day shipping offered by many of the larger companies. However, this won't come cheap, as Shopify will need to build out (or rent) an extensive warehouse network to compete.
Image source: Getty Images.
With logistics software and an already-purchased warehouse robotics company (6 River Systems), Shopify has set itself up well to offer superior fulfillment solutions to its customers.
3. Shopify's stock is incredibly cheap
To illustrate how out of favor Shopify is with the market, take a look at its price-to-sales (P/S) ratio.
SHOP PS Ratio data by YCharts
Shopify has crashed below a P/S of 10, something that hasn't been done since 2016.
The market is pricing Shopify as it will never grow again, but management's guidance is for growth to recover later in the year. Q1 2021 was the strongest quarter for nearly every e-commerce-related business. Later in the year, these tough comparisons will disappear, and many stocks, like Shopify, will shine again.
The only reason to sell
Shopify has no intentions of becoming consistently profitable anytime soon. Instead, management is working to ensure Shopify's tools are developed to the point any small business can come into the market and compete with the big boys. This is an ambitious long-term goal and will cause the stock to get hit hard when growth stocks are out of style (like they are now).
If you can't handle the price volatility inherent in many growth stocks, Shopify may not be an excellent stock for your portfolio. However, if you can hold on, the potential is enormous.
For example, Amazon fell under the same unprofitable scrutiny for many years, yet it was still one of the top-performing stocks over the past decade. Shopify has this same potential -- investors just need to be patient.
Those who can hold on (for as long as the business grows) will be rewarded. Shopify is an excellent buy at these prices; investors with a long-term mindset should take advantage of the extreme sale price.
