Shopify (SHOP -2.37%) is down over 75% in 2022 alone as the company has felt the slowdown in e-commerce spending. The company invested as though the boost in 2020 e-commerce activity would remain permanent, but as Shopify has seen, it has fallen back to normalized growth.
Many investors think that this is a screaming buy, and while shares are cheap, there are a few risks that smart investors have recognized. These risks could severely impede Shopify's long-term growth prospects. That said, smart investors know that if this e-commerce stock could overcome these challenges, there is a greenfield opportunity waiting for it.
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1. Amazon is a big concern
No kidding. Amazon (AMZN -1.65%) is the largest e-commerce player in the U.S., making it a formidable rival. Shopify estimated that in 2021, Amazon handled 41% of U.S. retail e-commerce sales, versus Shopify's 10% share. However, Amazon brings another risk to the table aside from its scale. That risk is "Buy with Prime."
Recently, Amazon announced that its Buy with Prime button could be used by Shopify merchants. This button allows Amazon Prime members who shop on platforms powered by Shopify to buy products easily. It competes directly with Shopify's payments service, Shop Pay. One of the principal revenue generators for Shopify's merchant solutions -- which represented almost 72% of Shopify's $1.3 billion in Q2 revenue -- is its payment processing fees. Therefore, this new integration could hurt Shopify's processing volume, and thus, overall revenue if it catches on.
Management has made it clear it sees this as a risk. The company recently warned merchants about installing Buy with Prime, saying it violates its terms of service. Additionally, it is rumored that Shopify will not protect merchants that use Buy with Prime from fraudulent transactions. It's safe to say that Shopify is worried about this move from Amazon, and is taking steps to prevent its merchants from using it.
2. Fulfillment is risky
Shopify has been investing heavily in expanding its fulfillment capabilities. In addition to its acquisition of 6 River Systems a few years back, it acquired Deliverr -- a fulfillment company -- earlier this year for $2.1 billion. Deliverr will spur the development of the Shopify Fulfillment Network (SFN), which, in theory, will be an end-to-end fulfillment network to help small Shopify merchants provide fast and reliable delivery to customers.
If this succeeds, the SFN could be a central selling point. One of the difficulties for small e-commerce businesses is keeping up with the fast shipping from giants like Amazon. However, the SFN will give millions of Shopify merchants the scale and infrastructure to deliver products quickly. Shopify even has Shop Promise, which provides reliable two-day delivery. Not only will this be a selling point and a reason a merchant might choose Shopify over other rivals like BigCommerce, but it will also likely be a substantial revenue generator for the company.
Shopify is going all-in on its SFN, and that's a risk too. If the company cannot effectively scale it and have it see broad-scale adoption, Shopify would lose a lot of money. The company predicts it will spend $1 billion in capital expenditures (capex) for the SFN over the next few years. For comparison, Shopify is only projected to spend $200 million in capex in 2022. Therefore, shareholders need these investments to pay off.
3. The tailwinds are in favor of Shopify
If Shopify can overcome these two potential risks, there's a greenfield opportunity ahead. Global retail e-commerce is expected to represent 22% of total retail sales in 2024. That's up from 18% in 2020. It's not unreasonable to think that this trend could continue past 2024, either. It's clear that the winds are moving in Shopify's favor, and there will likely be room for Shopify to capitalize on it if it remains one of the leaders in the space.
Additionally, today's prices look appealing. Shopify currently trades at 8.5 times sales, nearly its lowest valuation since coming public in 2015. It is closer to its all-time low than its historical average at this multiple.
Investing in Shopify might be wise, given the upside for investors with a diversified portfolio who can handle additional risk. That said, these concerns are more prominent than many investors might think. It isn't time to sell shares of Shopify (I'm certainly not), but it might not be the right time to go all-in, either. Rather, adding a small amount or simply holding on to your position might be the best move.
