This year has not been great for Shopify (SHOP -3.00%). The company has taken it on the chin, falling over 74% year to date, mainly because of recession fears and the worry that the e-commerce industry would revert to the growth rates it had in 2019.
Shopify's results seem to support the latter theory, with revenue and gross merchandise volume (GMV) expansion slowing in the company's second quarter -- which it reported on July 27, 2022. With the stock now trading at the same price it was during the market crash of March 2020, is Shopify a bargain or a value trap that investors should stay away from?
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Revenue growth is slowing, but expenses aren't
Shopify is stuck between a rock and a hard place right now. Since the COVID-19 pandemic, the company has been trying to invest heavily in what it thought was a permanent leap ahead in e-commerce penetration. Now, however, management has noticed that this pandemic jump is reverting to 2019 projections, and while U.S. e-commerce adoption is still much higher than it was in 2019, it is declining from 2020 and 2021.
As a result of this decline, the company's expansion rates have been falling. In the company's Q2 2022 earnings, revenue grew only 16% year over year to $1.3 billion. GMV only pushed 11% higher year over year to $46.9 billion. Comparatively, revenue and GMV in Q2 2021 jumped 57% and 40% year over year, respectively -- signaling a significant slowdown over the past year.
The company is also anticipating fourth-quarter revenue to increase less than previously thought. Management is expecting "both GMV and total revenue in 2022 to be more evenly distributed across the four quarters," whereas Shopify once thought that Q4 would have the highest expansion rate of the year. In other words, the company will likely see a much slower growth rate in Q4 than it was previously anticipating, which is particularly underwhelming given the higher activity in that quarter due to the holiday season.
What hasn't slowed down, however, is its expenses. Operating expenses in Q2 jumped almost 76% year over year to $846 million, driven by research and development expenses soaring 89% year over year to $347 million.
The silver linings
The good news is that management is looking to pull back these operating expenses significantly. Shopify anticipates that operating expense growth will meaningfully decelerate in both Q3 and Q4 on a year-over-year basis. Investors have already started to see these cutbacks in the form of layoffs: Shopify recently announced that it cut 10% of its workforce.
Additionally, the pain Shopify is seeing might already be reflected in its stock price. These earnings were not exceptional -- especially considering the company announced layoffs and a decline in e-commerce just one day before -- yet shares of Shopify popped 10% after the earnings report. This could potentially mean that the pain Shopify will see is already priced in, and any better-than-expected performance in the coming quarters could cause shares to soar.
One operational highlight Shopify had in Q2 was the continued adoption of Shopify Plus, with popular brands like Gold's Gym, ASICS, and numerous celebrity-backed brands becoming Plus customers. Now, Plus has more than 10,000 customers.
Shopify looks fairly valued
On an absolute basis, Shopify doesn't look like a screaming buy at 9.3 times sales. However, it's important to put that into context. Compared to other e-commerce companies like Etsy, Shopify looks fairly valued given their respective growth rates. Etsy trades at six times sales, so Shopify is at a 55% premium, comparatively. That said, Shopify's revenue rose 16% in Q2, 51% higher than Etsy's 10.6% increase over the same period. Therefore, based on expansion rates, Shopify doesn't look overpriced right now.
Is Shopify a buy right now?
There's no doubting that Shopify had a rough quarter, and the rate it could improve revenue over the next year could be underwhelming, too. However, Shopify is making the right moves. It is righting the ship in terms of expenses, and its products continue to see adoption -- despite a potential recession looming.
It might not be a time to go all-in on Shopify, but the company looks more like a bargain than a value trap today. For investors with a diversified portfolio, taking a small stake or dollar-cost averaging into a position in Shopify could be a move that pays off five years from now if the company sees a growing e-commerce industry again.
