Few growth stocks have been hit as hard in the market sell-off as Shopify (SHOP 0.37%).
Shares of the e-commerce software leader have plunged 80% in just six months as a combination of shifting market sentiment, slowing growth in e-commerce, and declining valuations in the software-as-a-service sector have all shredded the stock.
Even after that plunge, it's still hard to call Shopify cheap. It trades at a price-to-sales ratio of 7 based on trailing results, and its price-to-earnings ratio is well into the triple digits.
But buying Shopify could prove to be a smart move down the road. Here are three reasons you should take advantage of the discount.
Image source: Getty Images.
1. The stock is below pre-pandemic levels
Anchoring in the stock market (when you use a previous price to put the current price in perspective) can be a bad idea since markets shift and a stock doesn't really care what its previous price was. But sometimes anchoring makes sense.
For example, in the first two months of 2020, before the pandemic hit, Shopify never traded below $395 a share, and it went as high as $593.89 on Feb. 12, 2020. By comparison, the stock was below $350 on Friday, May 20.
Shopify shares have fallen from pre-pandemic levels even as revenue tripled over 2020 and 2021. In order for that to be a rational move, the stock's prospects need to have significantly worsened. While the short-term growth rate has slowed as the company faces difficult comparisons with the pandemic and there was a pull-forward effect in e-commerce from COVID, the long-term opportunity in online retail still looks promising.
There's no reason to think that the e-commerce market has suddenly matured.
2. Its growth rate will accelerate
Shopify's revenue growth slipped to 22% in the most recent quarter, by far the slowest in the company's publicly traded history, but there's a good reason for that.
Like other e-commerce companies, Shopify was lapping the last quarter before vaccines became available to the general public and one in which consumer spending was juiced by stimulus checks. Nearly every e-commerce company reported disappointing results in the first quarter, and Amazon even reported a decline in first-party sales.
NASDAQ: SHOP
Key Data Points
That Shopify was able to outgrow its peers in a difficult environment shows it continues to gain market share, but the difficult comparison also means that its growth should accelerate as the year progresses and comparisons get easier. With the recent sell-off, investors seem to be overreacting to short-term news.
3. Buy With Prime isn't a Shopify killer
One reason for the negativity in Shopify is Amazon's new Buy With Prime program, which allows shoppers to shop with Prime benefits on the merchants' own websites. Previously, Prime was available only through Amazon's site.
While this seems like a clever way for Amazon to tap into the Shopify user base, if the program is successful, it might not be so easy for Amazon to scale up to meet demand, since the company was already stretched thin once during the pandemic with delivery times becoming slower than normal. And it's not easy for a company of Amazon's size to ramp up capacity.
CEO Tobi Lütke was asked about Buy With Prime on the recent Shopify earnings call, and his response was telling. Lütke sees it as more of a complementary service than a competitor since it should expand the market for e-commerce and attract new online sellers, which is ultimately good for Shopify. As he put it, "Whatever is good for merchants is -- that will cause more entrepreneurship, which is exactly -- helps the vision of a company."
2022 is likely to be a tough year for Shopify, especially as higher interest rates are expected to cool off the economy. But in its guidance, management forecast accelerating revenue growth with the fourth quarter being the strongest. A year from now, the Shopify story will likely look a lot better than it does today, and there's a good chance the stock price will reflect that.
The stock is down mostly on short-term concerns. Now is a great time to take advantage of the sell-off.
