Down 80% year to date, Shopify's (SHOP 0.08%) decline has far outpaced that of the Nasdaq Composite index, which has "only" fallen 33% in the same period. The beleaguered e-commerce platform hasn't held up well after the COVID-19 pandemic. And while its unique business model gives it an economic moat, slowing growth and a high valuation should give investors pause. 

What went wrong for Shopify 

Founded in 2004 and going public in 2015, Shopify is an e-commerce platform designed to help small businesses create customized online stores where they can sell items both online and in-person. It differentiates itself from large third-party online marketplaces such as Amazon by focusing on merchants instead of the end consumer. 

Like most e-commerce companies, Shopify performed exceptionally well during the COVID-19 pandemic, which led to booms in both online shopping and online entrepreneurship. However, now that the crisis has eased, investors are beginning to reevaluate the company's value. 

Second-quarter earnings were disappointing. Revenue grew just 16% year over year to $1.3 billion -- a marked decceleration from the 57% growth rate reported in the prior-year period. To be fair, this can be blamed on challenging comparison against the exceptionally strong pandemic years. But Shopify's management seems to have assumed the boom would never end, causing it to overexpand in anticipation of growth that never materialized. This mistake has been disastrous for company margins. 

Profitability looks far away 

In the second quarter, Shopify reported much higher marketing, research and development, and administrative spending (which includes hiring staff). But with growth not as strong as expected, operating income dropped from a gain of $139.4 million to a loss of $190.2 million in the period.

Red stock chart flashing sell.

Image source: Getty Images.

To make matters worse, Shopify also faces intensifying competition from Amazon, which also boasts merchant solutions such as Fulfillment by Amazon and Buy with Prime, which allows customers to use perks such as free delivery and seamless checkout directly with partnered merchant stores. Competition with a behemoth like Amazon will not be cheap. And Shopify will have to invest significant capital into its fulfillment capabilities to stay relevant in the industry. 

In July, the company completed its $2.1 billion acquisition of end-to-end logistics platform Deliverr to help boost its fulfillment speed and capacity. This buyout could be the first of many similar investments that consume Shopify's capital and may have a negative effect on margins in the near term.  

The valuation is too high 

Despite falling 80% in 2022, Shopify stock still looks expensive, considering its slowing revenue and unclear path to profitability. With a price-to-sales (P/S) multiple of seven, its top-line valuation is almost triple Amazon's 2.4. And while both companies face similar challenges, Amazon's diversified business (which includes cloud computing and digital advertising) can help make up for the slack in its e-commerce operations.

Shopify doesn't have a backup plan, and investors should avoid the stock because of continued risk to the downside.