Shares of Shopify (SHOP 2.58%) are down by 75.8% so far in 2022, according to data from S&P Global Market Intelligence. The e-commerce technology expert entered this year with a full head of steam. Share prices had gained 895% over the previous three years and the stock was trading at 683 times trailing earnings or 387 times free cash flow. That lofty valuation was overdue for a correction, which arrived with a vengeance as investors started to worry about geopolitical tensions and rising inflation rates.
Inflationary pressure on the consumer market comes with both positive and negative effects on Shopify's business prospects. On the upside, many e-commerce vendors offer their products at lower prices than their brick-and-mortar rivals, attracting more shoppers when budgetary belts are tight. However, Shopify's profit margin is razor-thin even in the best of times, so anything that weighs on that skinny profit line can be painful in the short term.
As a result, Shopify's business results haven't done much to alleviate the macroeconomic market pressure. Top-line growth is running at the slowest rates in the COVID-19 era, and both earnings and free cash flow are trending downward. In fact, Shopify's last three earnings reports printed the adjusted bottom-line numbers in red ink. Before that painful streak, the company had only reported negative earnings in a single quarter since going public in 2015.
Some of the revenue slowdown was the result of tough year-over-year comparisons, as Shopify's sales were roaring in 2020 and 2021. However, Shopify's business mix is sliding toward the lower-margin end in several segments, and the company is running out of low-hanging fruit in terms of finding new customers.
While it's understandable that Shopify's skyrocketing growth would encounter some speed bumps of this nature along the way, the timing of this particular lag was quite unfortunate. It's a bad look in the context of a generally more risk-averse stock market.
My fellow Fool.com colleagues disagree on Shopify's long-term potential from this point. Some see a brilliant buy-in opportunity due to the dramatic price drop, while others want to see the company straighten out its profitability troubles before they'll hit that "buy" button.
Personally, I tend to agree with the more cautious voices. There are so many no-brainer buys available in this bear market that I don't want to worry about Shopify's future profits (or lack thereof). That's true even if you limit your search to crashing growth stocks.