2022 has been unkind to Shopify's (SHOP 1.42%) shareholders. After soaring during the early stages of the pandemic, when COVID-related restrictions drove more people to shop online, the e-commerce platform's shares reversed course as safety measures were lifted and shoppers returned to traditional retail stores. Shopify's stock price is now down a shocking 80% this year.
NASDAQ: SHOP
Key Data Points
Could this brutal downturn be an opportunity for long-term investors to buy shares of the beaten-down growth stock at bargain prices? Let's take a look at Shopify's competitive position and expansion potential to answer that question.
The bull case for Shopify stock
Shopify isn't just benefiting from the e-commerce megatrend -- it's helping to enable it. Its software gives entrepreneurs the tools they need to build and grow their online stores. For as little as $29 per month, Shopify provides website development, payment processing, inventory management, and shipping solutions.
Millions of merchants have flocked to Shopify to power their businesses. The commerce platform's revenue, in turn, has soared more than twentyfold since 2015, the year of its initial public offering.
Yet despite years of torrid growth, Shopify still has a long runway for expansion ahead. Global e-commerce sales will exceed $8 trillion by 2026, up from $5.2 trillion in 2021, according to eMarketer. This should leave plenty of room for Shopify to grow its roughly $200 billion in annual gross merchandise volume (GMV) -- essentially, the total dollar amount of merchant sales processed on its platform -- and $5 billion revenue base.
Yet Shopify isn't just waiting for a rising e-commerce tide to lift its boat. It's investing aggressively to develop new products and services to fuel its growth. New point-of-sale devices are helping Shopify become a powerful force in the offline retail arena. Shopify Markets, a suite of cross-border commerce solutions, is helping merchants expand internationally. And Shopify recently acquired shipping technology specialist Deliverr for $2.1 billion to strengthen its burgeoning fulfillment network.
Risks for investors to consider
Despite its impressive long-term expansion prospects, Shopify is facing some significant short-term challenges. The e-commerce leader's growth rates slowed as the pandemic progressed and the economy reopened. Shopify's revenue growth declined to 16% in the second quarter, down from 57% in 2021 and a stunning 86% in 2020.
Moreover, Shopify's investments in its fulfillment network and other growth initiatives are weighing on its profitability. Its operating margin checked in at negative 15% in the second quarter, down from positive 6% in 2021. Shopify also expects to produce adjusted operating losses in the second half of 2022.
With roughly $7 billion in cash and investments on its fortresslike balance sheet, Shopify can weather these losses as it works to achieve long-term profitability. But investors will want to see steady progress in this regard.
And reaching this goal could prove challenging due to the growing competitive threat from e-commerce titan Amazon.com (AMZN +2.05%). Amazon's new Buy With Prime service, which offers a fast checkout experience and free delivery, could weaken Shopify's payment processing business. Meanwhile, Shopify's big push into fulfillment and delivery services will put it in more direct competition with Amazon -- in an area where the online retail giant holds a commanding lead after investing tens of billions of dollars to build its global distribution network. Shopify's investments, in turn, might not pay off the way management hopes they will.
Shopify's shares are still richly priced
Even after the 80% decline in its stock price, Shopify's shares are still not cheap. Its stock currently trades for about 7.8 times sales, compared to 2.6 for Amazon and 2.3 for the average company in the S&P 500. Shopify's entrenched place within the e-commerce industry and strong growth potential justify a premium valuation, but it's difficult to argue that its shares are a screaming bargain today.
So is Shopify stock a buy?
Fans of aggressive growth companies might find Shopify intriguing, but more cautious investors may want to wait for the fallen e-commerce star to show progress toward achieving sustained profitability before buying shares.
