It has been a tough run for Shopify (SHOP 0.92%) shareholders. Nearly everyone who bought the e-commerce company's stock in the last three years is down on their investment as of this writing.
Moreover, there are reasons to expect more pain in the coming months, and investors should buckle up for the rough ride.
Shopify is still adapting to a post-COVID environment
Shopify has been one of the most successful growth stories in the last decade. Since it went public in 2015, revenue grew from $205 million that year to $4.6 billion in 2021. While it benefited from the long-term growth of e-commerce, direct-to-consumer, and multichannel retail, the COVID-19 pandemic turbocharged those tailwinds in 2020 and 2021 too.
As the threat of the pandemic fades around the globe, however, growth has slowed (or stalled entirely) for even the biggest names across e-commerce and retail. The economic reopening, higher inflation and interest rates, and geopolitical tensions are major drivers of consumer sentiment and spending (both online and offline). Any uncertainty in those areas thus has an impact on Shopify and its merchants.
Shopify's recent performance reflects the new reality. Revenue was up 20% year over year through the first three quarters of 2022, down from the 66% and 82% growth in the same periods of 2021 and 2020, respectively.
As revenue growth slows, Shopify's bottom line has also plunged into the red this year due to reduced operating leverage and continued investment in new initiatives. Operating losses have totaled $634 million year to date, a steep decline from the prior-year period's $254 million profit.
Moreover, the company implemented a 10% reduction to its headcount in July as the advances management had hoped would persist as a result of the pandemic failed to materialize. Thus, investors shouldn't expect a quick turnaround for the company, and the lower growth rate and mounting losses are likely to persist for at least a few more quarters.
Its stock price will continue to be very volatile
Shopify's stock price has been in free fall the last year. From its peak of $176 per share, the stock has fallen 80% to just $35 as of this writing.
That massive decline means the company is trading at a low valuation compared to its historical levels. For perspective, the tech company has a price-to-sales(P/S) ratio of 8.9, just a fraction of its five-year average P/S ratio of nearly 30. Bargain hunters may be tempted to to scoop up the stock while it's relatively cheap.
But here's the thing, major indexes are still in bear market territory with the Nasdaq Composite down 32% from its peak and the S&P 500 down 20%. No one knows when this downturn will end, and stock prices for all companies (including Shopify) could fall further in the coming months.
Keep in mind Shopify's valuation still represents a big premium over the broad market. Unprofitable growth stocks have seen some of the biggest declines this year, and Shopify is moving in the wrong direction on both counts with growth decelerating and losses stacking up.
What does all this mean to investors?
Shopify has been going through one of the most challenging periods since it went public. Even then, the company's long-term thesis remains largely intact as it works tirelessly to grow its market share in the global retail industry. It is expanding internationally, growing its brick-and-mortar retail (via Shopify POS), and adding new solutions to keep its growth machine spinning.
Existing shareholders should wait patiently for the storm to recede, but risk-averse investors should think twice before joining this volatile ride.