The Nasdaq sits 32% lower than the peak of late last year. That's not when most people are thinking about investments that can become huge winners. But maybe it should be. Stocks are certainly down for a reason. Quickly rising interest rates, inflation, geopolitical concerns, and continued supply chain disruptions have all soured Wall Street's outlook about the near future. But Wall Street is fickle. And no environment lasts forever -- good or bad.
In all downturns, there are beaten-down companies that will reclaim their glory and see their stock prices soar beyond previous highs. With time, Shopify (SHOP -2.77%) has the potential to be one of them. Diving into the numbers shows how much momentum the company has lost and what it can do to turn things around.
Getting back to normal
First things first: The stock is down almost 80% so far this year. That's a soul-crushing drop for those who have owned shares. CEO Tobi Lütke explained the reasoning best in a memo to employees about layoffs. The company bet -- by hiring staff and building out infrastructure -- that the pandemic permanently accelerated e-commerce by five to 10 years. It didn't. As things return to normal, management needs to take some of its chips off the table.
The boom in online shopping during the pandemic drove a doubling of revenue from July 2020 through March 2021. That was followed by three quarters of nearly 50% growth. But Shopify only posted 21% and 15% top-line growth the past two quarters.
That's not great. But some slowdown had to be expected. Still, the company's operating profit -- even after management's adjustments -- has turned negative.
Data source: Shopify.
A powerful business with potential
Getting those operating costs back in line will be painful. The aforementioned layoffs happened in July and targeted 10% of the workforce -- about 1,000 people. That might affect morale. But Shopify doubled its headcount between 2019 and 2021 to more than 10,000 employees. With the increased staffing, it's not likely to impede operations or product development.
Taking a step back from the most recent numbers, Shopify's suite of products is still gaining adoption by more and more customers. Gross Merchandise Volume (GMV) -- the total dollars of transactions facilitated through the Shopify platform -- has jumped 55% per year since before the pandemic. Although disappointing, growth in the most recent quarter was still faster than the pace of both online and total retail sales in the U.S., according to the company. The lending arm, Shopify Capital, grew 56% annualized over that span. The company's payments solution posted 67% compounded growth. As long as more businesses are coming to its platform and engaging with the products, growth should solve expense issues over time.
| Product | TTM* | Q3 2018-Q2 2019 | Annualized Growth |
|---|---|---|---|
| Gross merchandise volume | $186.0 billion | $49.7 billion | 55% |
| Shopify Capital | $1.48 billion | $391.2 million | 56% |
| Shopify Payments | $95.1 billion | $20.6 billion | 67% |
Data source: Shopify. *TTM=trailing twelve months.
What to look for in the coming quarters
Seasonality, as well as integrating a $2.1 billion acquisition, will make it more difficult to figure out if Lütke and company are making progress in 2022. Management called for an adjusted loss in the fourth quarter larger than the second quarter, but smaller than the third quarter. That sounds like another roller-coaster ride over the short term. An apples-to-apples comparison of quarterly performance in the new environment might take longer. In the meantime, a few elements of Shopify's guidance for the remainder of the year could prove helpful.
First, the company said adjusted operating expense should "meaningfully decelerate year over year in the third quarter, and again in the fourth quarter." Whether that turns out to mean the negative trends slow or the negative operating income flips back to positive will be important. Second, the number of customers joining the platform in the second half of the year should be more than the first half. If so, it could be a signal that growth is returning to normal after a post-pandemic hangover. Expect Lütke to be quizzed on this commitment by analysts every chance they get. Any hint of acceleration could boost shares significantly.
Shopify continues to innovate for customers. And those customers continue leveraging its platform to manage and grow their businesses. If that doesn't change, and it can get costs under control without undermining growth, shares likely represent an attractive risk-reward proposition at this point.
Of course, with dark clouds on the economic horizon, things could still get worse before they get better. I'm willing to take the long view for one of the most important -- and most customer-centric -- e-commerce companies around.
