Shopify (SHOP -3.85%) stock has given up several years of gains in just a few painful months this year. The e-commerce giant was hit by a sharp demand slowdown just after management committed to a spending plan that assumed much higher sales.
The resulting earnings slump is a key reason why shares have plummeted 80% through early October. But how bright is the long-term outlook for this leading e-commerce platform?
Let's examine whether the stock has a good chance of rebounding once the current economic volatility passes.
Where the business stands
Shopify has been growing at a 53% compound annual growth rate since mid-2019, yet those massive gains are slowing. Sales rose just 16% in the most recent quarter, in fact. Management says this growth rate is far below its projections from early 2022, mainly because consumers have pivoted back toward normal spending patterns rather than continuing to favor e-commerce as they did during earlier phases of the pandemic.
The main impact of this change is that Shopify is expecting slower growth in key metrics like sales volumes and the enrollment of new merchants. These areas should still grow over the next several years. But management was too bullish about that expansion pace. "We overshot our prediction," company president Harley Finkelstein told investors in late July.
Where Shopify is headed
Although things might get worse before they get better, Shopify has some good reason to remain ambitious about its growth prospects. It offers point-of-sale solutions that integrate with its e-commerce platform so that sales can still expand as spending shifts back away from digital channels.
The platform integration in web destinations like Facebook, Instagram, and Google is in its early days, but it could grow to a meaningful volume over the next few years. Shopify in 2025 will also likely be helping far more merchants go global with their products through its effective Markets tool.
Yet the company faces a more immediate cash crunch that it will have to weather before then. Operating cash flow has turned negative in recent quarters, mainly thanks to management's bold bets on growth that didn't materialize in 2022. Adjusted net loss was $38 million in the most recent quarter compared to an adjusted profit of nearly $300 million a year ago. Investors should watch for this figure to improve thanks to a mix of cost cuts and rising prices.
The stock likely won't recover until investors can see a clear path back toward positive earnings and cash flow, which might not be obvious for another quarter or two -- at the earliest. But the sell-off appears to reflect this negativity already, along with the assumption of a recession ahead. Shopify is valued as if it will continue generating losses and won't return to growth anytime soon.
That seems like an overreaction to what's likely to be a temporary operating slump. Sure, Shopify will have more financial pain ahead as it works to reorient its spending patterns to adjust to slowing e-commerce demand.
But it still maintains a leading platform that will facilitate multichannel commerce well into the future. While the next few quarters will likely be volatile, investors who can withstand some risk should consider holding Shopify as they wait for the business to recover in 2023 and beyond.