Shopify's (SHOP 4.59%) stock price surged 17% on Thursday, Oct. 27, in response to its third-quarter earnings report. The e-commerce service provider's revenue rose 22% year over year to $1.37 billion and beat analysts' estimates by $30 million. Its adjusted net loss narrowed from $103 million to $30 million, or $0.02 per share, which cleared the consensus forecast by $0.05.

Is Shopify finally primed to bounce back after losing roughly three-quarters of its value this year? Let's review the company's main challenges, current growth rates, and valuations to see whether the stock is worth buying again.

A person shops for purses online.

Image source: Getty Images.

What happened to Shopify?

Shopify's platform allows businesses to set up their own e-commerce sites, process payments, fulfill orders, and manage their marketing campaigns. It's a popular option for businesses that don't want to tether themselves to a large online marketplace like Amazon (AMZN -0.09%).

Shopify's growth in gross merchandise volume (GMV), gross payment volume (GPV), and total revenue accelerated significantly in 2020 as the pandemic forced more businesses to sell their products online. However, its growth decelerated over the past two years as the pandemic passed and those tailwinds dissipated.

Metric

First 9 Months of 2022

2021

2020

2019

GMV growth (YOY)

12%

47%

96%

49%

GPV growth (YOY)

24%

59%

110%

55%

Revenue growth (YOY)

20%

57%

86%

47%

Data source: Shopify. YOY = year over year.

Many of Shopify's merchants also relied heavily on Meta Platforms' Facebook and Instagram to advertise their products. Apple's privacy changes on iOS affected those targeted ads and could also impact its near-term revenue growth.

Shopify didn't provide clear-cut guidance for the rest of the year, but it predicted its GMV growth would "outperform the broader U.S. retail market" in the fourth quarter. That's even as the stronger dollar, higher inflation, and rising interest rates "continue to negatively affect the consumer's purchasing power of discretionary goods and services." Analysts expect its revenue to rise 19% to $5.5 billion this year and grow another 23% to $6.8 billion in 2023.

Investors are more worried about its margins

Shopify has been ramping up its spending as its revenue growth slows down. It acquired 6 River Systems in 2019 to strengthen its first-party logistics network and acquired the influencer marketing start-up Dovetale and the logistics company Deliverr earlier this year. Those acquisitions -- which expanded its lower-margin merchant solutions segment instead of its higher-margin subscription services segment -- compressed Shopify's gross margins and caused it to turn unprofitable again on a GAAP (generally accepted accounting principles) basis.

Metric

First 9 Months of 2022

2021

2020

2019

Gross margin

50.6%

53.8%

52.6%

54.9%

Operating income

($634 million)

$269 million

$90 million

($141 million)

Net income

($2.84 billion)

$2.91 billion

$320 million

($125 million)

Data source: Shopify. YOY = year over year.

Analysts expect Shopify to post a whopping net loss of $3.08 billion this year, followed by a narrower net loss of $807 million in 2023. But it's unlikely to break even anytime soon -- and all that red ink has made it an unappealing investment as interest rates continue to rise. To make matters worse, Shopify still faces fierce competition from similar e-commerce service providers like BigCommerce, Adobe's Magento, and Amazon's Selz. The saturation of this market could ultimately limit Shopify's pricing power and make it even tougher to narrow its losses.

Is Shopify's stock getting too cheap to ignore?

Shopify's stock currently trades at less than five times next year's sales. That price-to-sales ratio might seem reasonable, but it still isn't a screaming bargain compared to its e-commerce peers. BigCommerce, which is growing at a comparable rate to Shopify, trades at three times next year's sales. MercadoLibre and Pinduoduo, both growing faster than Shopify, also trade at about three times next year's sales.

Therefore, I believe Shopify's stock could still easily lose another 40% of its value -- which would put it just above its initial public offering (IPO) price of $17 from 2015 -- before it's considered too cheap to ignore. I don't think Shopify is doomed since it was still sitting on $4.9 billion in cash, cash equivalents, and marketable securities at the end of the third quarter. But I also wouldn't rush to chase its post-earnings pop when so many other high-quality e-commerce stocks are still on sale.