Shopify (SHOP +2.94%) stock fell considerably off its highs in 2021. The company that helps businesses establish an online selling platform thrived at the pandemic's onset in 2020 when non-essential establishments, including many smaller retailers, were temporarily forced to shut their doors to in-person customers. To stay in business, these brick-and-mortar businesses needed to create websites to help maintain customer relationships and facilitate sales.
In 2021, the gradual reversal of that trend created difficult year-over-year comparisons for Shopify. E-commerce as a percentage of overall sales had surged during the initial stages of the pandemic. With business restrictions mostly removed, customers returned to old habits, including more in-person transactions.
The business slowdown for Shopify unsurprisingly resulted in a falling stock price. That has investors asking if the stock is worth considering now. Let's see if we can find an answer.
NASDAQ: SHOP
Key Data Points
Shopify is not just a pandemic beneficiary
While it's true that Shopify benefited from the surge in online shopping, Investors should note that the company was growing exponentially before the pandemic was declared. From 2012 to 2019, Shopify's revenue went from $24 million to $1.6 billion. So it had strong growth prospects that just ramped up to a new level after stay-at-home orders went into effect. This growth was more a reflection of the longer-running trend of consumer shopping moving online.
SHOP Revenue (Annual) data by YCharts.
Looking back over the last two decades, e-commerce spending as a share of overall retail spending has grown from less than 2% in 2000 to more than 12% in 2021. Even with some near-term volatility, it is reasonable to assume that over the next decade, online spending's share of overall consumer spending will continue to increase.
Indisputable convenience advantages will fuel that expansion. Shopify provides its clients with a means to provide customers with that convenience. Businesses must establish an online presence to meet the customer where they want to shop or risk missing out on sales. Shopify, as evidenced by its phenomenal growth, has become a trusted source for enterprises looking to grow online. Shopify has expanded its services to not only help establish a business-oriented website, but to also help merchants manage transactions and payments, shipping and handling, as well as short-term funding.
Shopify's stock is as cheap as it's been in five years
With this tremendous opportunity to go after, Shopify has been investing in growth. It recently announced a $2.1 billion acquisition of Deliverr, a logistics company that will help Shopify enhance fulfillment services to its merchants. Moreover, Shopify informed investors that it would be reinvesting all its gross profits in 2022 on growth initiatives. Those investments, along with slowing online sales and a broader market sell-off, have spooked some investors, which has caused Shopify's stock to fall considerably off its highs.
SHOP PS Ratio data by YCharts.
That price drop has Shopify stock trading at a price-to-sales ratio of 8, the cheapest it has been in the last five years. An inexpensive valuation coupled with excellent long-term prospects makes Shopify stock a buy in my book. The near-term risk of decreasing online spending during economic reopening is palpable, to be sure. Still, the conveniences of online shopping should help lift sales higher in the longer term.
