Shopify's (SHOP 4.90%) stock has pulled back about 80% from its all-time high last November. The Canadian e-commerce services provider was once a red-hot stock, but the bulls retreated as its growth cooled off in a post-lockdown world. Rising interest rates exacerbated that painful decline.
But after giving up all of its pandemic-era gains, is Shopify finally worth buying again? Let's take a fresh look at the company to see if it's too late to buy its stock -- or if it's finally a turnaround play.
Image source: Getty Images.
Shopify's core strengths
Shopify's platform enables merchants to set up their own online stores, process payments, fulfill orders, and manage their online marketing campaigns. It helps merchants craft their own online presence without joining a crowded third-party marketplace like Amazon (AMZN 1.30%) or eBay. Over the past decade, Shopify's niche market has expanded into a mainstream one.
At the time of its IPO in 2015, Shopify served 162,261 merchants. Today, it serves "millions" of merchants worldwide. Between 2015 and 2021, its annual revenue surged from $205 million to $4.61 billion, representing a compound annual growth rate (CAGR) of 68%. It also turned profitable on a GAAP (generally accepted accounting principles) basis in 2020 and 2021.
The bulls believe Shopify will continue to expand as merchants revolt against Amazon and other large online marketplaces. They also believe it can lock in its customers with its integrated Shop Pay payments system, its dedicated fulfillment network, and its own point-of-sale (POS) systems.
They'll also point out that Shopify's stock looks historically cheap at less than six times this year's sales. At its peak last November, it traded at 35 times the sales it would actually generate in 2021.
Shopify's glaring weaknesses
Shopify's growth in gross merchandise volume (GMV), gross payment volume (GPV), and revenue accelerated in 2020 as more merchants and shoppers shifted online during the pandemic. Stimulus checks also drove shoppers to make more purchases. However, Shopify's growth decelerated last year as the pandemic-era tailwinds faded, and that slowdown persisted throughout the first half of 2022.
|
Period |
FY 2019 |
FY 2020 |
FY 2021 |
1H 2022 |
|---|---|---|---|---|
|
GMV Growth (YOY) |
49% |
96% |
47% |
13% |
|
GPV Growth (YOY) |
55% |
110% |
59% |
25% |
|
Revenue Growth (YOY) |
47% |
86% |
57% |
19% |
Data source: Shopify. YOY = Year-over-year.
Analysts expect Shopify's revenue to rise 19% for the full year, then grow 25% to $6.87 billion in 2023. Those growth rates are still robust, but they indicate that Shopify's "hypergrowth" days are over.
As Shopify's growth cooled off, its gross margins declined as it recognized a higher mix of revenue from its lower-margin Merchant Solutions segment. Its operating margins also plummeted this year as it ramped up its logistics, R&D, data, sales, and marketing investments.
|
Period |
FY 2019 |
FY 2020 |
FY 2021 |
1H 2022 |
|---|---|---|---|---|
|
Adjusted Gross Margin |
55.7% |
53.5% |
54.4% |
52.5% |
|
Adjusted Operating Margin |
2.9% |
14.9% |
15.6% |
(0.4%) |
Data source: Shopify.
It expects that pressure to continue in the second half of the year as it integrates its recent $2.1 billion acquisition of the fulfillment technology provider Deliverr.
As a result, analysts expect Shopify's operating margins to remain negative in 2022 and 2023, and for it to stay unprofitable through at least 2024. That combination of slowing growth and red ink makes Shopify a tough stock to recommend as interest rates continue to climb.
Stick with other e-commerce stocks instead
Shopify had a great run during the pandemic, but its future looks murky. It still faces competition from similar e-commerce service platforms like BigCommerce (BIGC 0.69%), Adobe's (ADBE 1.29%) Magento, and Amazon's Selz, and its price-to-sales ratio isn't that low relative to those of its industry peers.
For example, the Latin American e-commerce giant MercadoLibre (MELI 1.96%) is growing faster than Shopify while expanding its gross and operating margins -- but it trades at just four times this year's sales. BigCommerce is also expected to generate stronger sales growth than Shopify this year, but it trades at less than five times that forecast.
Based on those comparisons, it certainly isn't too late to buy Shopify's stock. Instead, investors should wait to see if its shares drop even further before pulling the trigger.
