Back in April, Shopify (SHOP 0.23%) announced its plans for a 10-for-1 stock split that will also boost CEO Tobi Lütke's voting stake to 40% by issuing a new class of "founder's shares." Shareholders approved the proposal on June 8, and the stock will split on June 28.
The maneuver might generate some fresh investor interest in Shopify's stock, which has lost more than three-quarters of its value this year amid concerns about its high valuation and slowing growth in a post-lockdown market. Inflation, rising interest rates, and other macroeconomic headwinds exacerbated that pain by driving investors further away from pandemic-era growth plays.
Should investors buy Shopify right now as the market looks the other way? Or should they wait for the stock split to be completed before reassessing its prospects?
Image source: Getty Images.
What happened to Shopify?
Shopify's e-commerce services enable businesses to set up their own online stores, process payments, fulfill orders, and manage their own marketing campaigns without joining a large online marketplace like Amazon. Its disruptive approach, early-mover advantage, and catchy brand enabled it to grow like a weed after its IPO in 2015. Between 2015 and 2021, its annual revenues grew at a compound annual rate of 68%, surging from $205 million to $4.61 billion. It was also profitable on a generally accepted accounting principles (GAAP) basis in 2020 and 2021.
Shopify's year-over-year growth in gross merchandise volume, gross payment volume, and total revenue significantly accelerated in 2020 as the pandemic forced more businesses to sell their products online. But that momentum waned throughout 2021 and early 2022 as businesses reopened their brick-and-mortar stores and consumers resumed in-person shopping.
|
Metric |
2019 Change |
2020 Change |
2021 Change |
Q1 2022 Change (YOY) |
|---|---|---|---|---|
|
Gross merchandise volume |
49% |
96% |
47% |
16% |
|
Gross payment volume |
55% |
110% |
59% |
27% |
|
Revenue |
47% |
86% |
57% |
22% |
Data source: Shopify. YOY = Year-over-year.
That deceleration should come as no surprise. Many e-commerce companies are grappling with similar slowdowns as people shift back toward their pre-pandemic shopping behaviors. However, Shopify's adjusted gross and operating margins also declined sharply in the first quarter of 2022 as it recognized a higher mix of lower-margin revenues, ramped up its logistics investments, and expanded its R&D, data, sales, and marketing teams.
|
Metric |
2019 |
2020 |
2021 |
Q1 2022 |
|---|---|---|---|---|
|
Adjusted gross margin |
55.7% |
53.5% |
54.4% |
53.7% |
|
Adjusted operating margin |
2.9% |
14.9% |
15.6% |
2.6% |
Data source: Shopify.
Management expects that pressure to persist over the next few quarters as it integrates Deliverr, a fulfillment technology provider that it's acquiring for $2.1 billion in cash and stock.
Analysts still expect Shopify's revenue to rise by 26% to $5.82 billion this year, but they also expect it to bleed red ink again with a net loss of $2 billion. That ugly mix of slowing growth and rising expenses makes Shopify a painfully tough stock to own at a time when the market is volatile and interest rates are rising.
A stock split won't address the real problems
Shopify became absurdly overvalued last year. At its all-time high of $1,690.60 per share last November, the Canadian e-commerce company was valued at $212.3 billion -- or 46 times the sales it generated in 2021. That valuation was barely sustainable in a bull market. It naturally deflated as Wall Street headed into a bear market.
But even today, trading at about seven times this year's expected sales, Shopify's stock still can't be considered a screaming bargain yet. Consider, for example, MercadoLibre. The Latin American e-commerce giant -- which is expected to generate 46% sales growth this year -- trades at just three times its forecasted 2022 sales. And Amazon, which is expected to grow its revenues by 12% this year, trades at two times its revenue estimate.
Splitting Shopify's stock won't change its valuation, since each new share will merely represent one-tenth of an old share. A lower price tag might temporarily spur more options trading (since each options contract is worth 100 shares) and more purchases by retail investors, which would in turn generate more liquidity for short-term traders. But for long-term investors, the stock split will ultimately be meaningless.
Shopify's stock split also isn't as meaningful as Amazon's recent split or Alphabet's upcoming split. Both those stocks traded above $2,000 before splitting, but Shopify was only trading at $617 when it announced its split on April 11. Looked at in that light, the company's decision seems like a bandwagon move that conveniently obfuscates the introduction of its "founder shares."
Investors should wait to buy Shopify
Shopify has a lot of long-term growth potential, but it also faces a lot of near-term headwinds, and its valuation is still too high. Therefore, I believe the right time to buy Shopify will be long after it completes its stock split -- after its growth rates have finally stabilized and its valuation has cooled down to a more sustainable level. Until then, investors should stick with more promising growth stocks or recession-resistant plays to ride out the current market downturn.
