Investors have been avoiding e-commerce stocks lately due to factors such as shifting consumer spending and higher inflation. Shopify (SHOP -2.37%), a leading e-commerce solutions provider, has seen its share price plunge by more than 80% from its peak of $176.
The stock price correction will attract bargain hunters, but is Shopify stock a buy now? Let's explore the idea.
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Shopify executed well over the last few years
Shopify has had a phenomenal run. Since its IPO in 2015, revenue grew from $205 million to $4.6 billion last year -- a more than twentyfold increase.
While many factors contribute to Shopify's success, its relentless focus on making e-commerce easy for users (entrepreneurs and corporations) has been the main driver.
Shopify's value proposition is straightforward. It helps merchants sell their products by providing them with comprehensive, cutting-edge online tools, including online shops, payment services, fulfillment and shipping, and more. In doing so, the tech company democratizes the tools and services traditionally available only to big corporations.
Shopify did not get here overnight -- it only offered some basic e-commerce tools in the early days. But as merchants' needs evolved, the tech company adapted and rolled out new services. Major recent add-ons include the Shopify Fulfilment Network and Shop Pay Installments, to mention a few.
An excellent example of management's ability to deliver solid results in a rapidly changing environment was Shopify's performance during the COVID-19 pandemic. Merchants, especially those without a digital presence, scrambled to move their businesses online as global economies went into lockdown mode.
The demand for Shopify's services shot through the roof as revenue surged 86% in 2020 and another 57% in 2021.
Shopify has mixed prospects
Though COVID-19 gave the company an extra boost on its growth trajectory, the world's exit from the worst stages of the pandemic has become a headwind as consumers return to their pre-pandemic lifestyles.
E-commerce penetration in the U.S. fell from 15.7% in the second quarter of 2020 to 14.3% in the first quarter of 2022. Shopify's revenue for the second quarter of 2022 was up only 16%, down from the 57% growth it reported in the prior-year period.
And with the remainder of the year looking like it will continue to be plagued by high inflation, geopolitical tension, and other issues, it is unlikely Shopify will see a meaningful reacceleration of growth for the rest of the year. To respond to these challenges, Shopify laid off about 10% of its staff in July. At the time of that announcement, CEO Tobias Lütke spoke to the challenges Shopify has faced this year:
We bet that the channel mix - the share of dollars that travel through e-commerce rather than physical retail - would permanently leap ahead by five or even 10 years. [...] It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-COVID data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful five-year leap ahead. Our market share in e-commerce is a lot higher than it is in retail, so this matters.
So, while Shopify's near-term outlook looks unexciting, its long-term prospects remain attractive. Shopify's retail market share remains low in the U.S. (less than 2%), giving it plenty of room to expand. And that's before we consider the opportunities beyond the U.S. as Shopify taps into a $4.9 trillion global e-commerce market.
To capture a slice of this huge market opportunity, Shopify is still adding new tools and services to help merchants succeed. Shopify Shipping, Shopify Capital, Retail POS, and Shop Pay Installments are just a few examples of the copany's efforts to offer a holistic solution to merchants around the world.
As long as it innovates and expands its platform, the tech company positions itself as a leader in a large and growing opportunity.
A quick word on Shopify's valuation
After falling more than 80% from its peak, Shopify stock is still trading at 7.4 times sales. This valuation compares favorably to its five-year average of 30, but that's not the whole story.
Relative to e-commerce peers like Amazon, Etsy, and Wix.com, Shopify still commands quite a premium.
Start with a small position and think long term
Shopify still boasts a solid track record of delivering outstanding growth.
In the coming months, however, the company will likely see its momentum stall amid the more challenging operating environment. In this bear market, companies struggling with profitability while sporting a high valuation will continue to see wild swings up and down.
But looking past this near-term volatility, the company's long-term prospects are still compelling. Investors willing to look at least five years out should consider initiating a small position today and slowly add to it over time.
