Wall Street seems to have changed its tune about Shopify (SHOP 2.63%) stock in recent days. Yes, the shares are still in deeply negative territory for 2022. But the stock price jumped by double-digit percentages after Shopify announced its third-quarter earnings results last week.
That report didn't do much to change the negative profit trend that has pressured the stock over the last year. But long-term investors have some good reasons to remain optimistic about Shopify and the wider e-commerce software industry. Here are three of them.
1. Growth is a bit uneven, but the average is still quite high
Like all of its peers, Shopify is seeing the effect of a pullback in e-commerce demand following pandemic-related surges in 2020 and 2021. Year-over-year revenue growth has slowed to its weakest rate on record. But it's still growth.
SHOP operating revenue (quarterly YOY growth). Data by YCharts. YOY = year over year.
Shopify is still well positioned in an industry niche that's likely to see huge long-term growth. Most merchants need to have a robust online presence along with their physical stores. This steadily expanding need is reflected in Shopify's broader growth rate that smooths out the impact from the pandemic demand spike last year.
Its compound average growth rate over the last three years is 52%, in fact. Sales increases will be much lower over the next few quarters. But its connection to merchants makes it likely that Shopify will be a leader during the next upturn.
2. Profits will arrive
Shopify is still stuck in a net loss position, but that bad situation won't last forever. Adjusted operating loss, which accounts for one-time charges, landed at 3% of sales in the third quarter, indicating stabilization compared to the prior quarter.
NASDAQ: SHOP
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And management says it made progress in adjusting its spending pace after getting caught by surprise with consumers' shifting preferences away from online shopping following pandemic lockdowns. "We recalibrated our organizational structure," chief financial officer Amy Shapero said in a press release.
It will take a while longer before those changes start boosting profitability, but Shopify is projecting declining expense growth starting in the current quarter.
3. It's all about the platform
Shopify's expanding platform is its best asset for navigating the potentially turbulent period ahead. Successful new introductions helped its software-as-a-service revenue rise to nearly $1 billion in the third quarter. The company is seeing solid growth across a wide range of products, including its payment processing, financing, and international market access offerings.
Shopify will need to keep adding more popular services over time so that it can pair a rising customer base with higher average annual spending. The growth hangover from the pandemic obscures those benefits right now. But Shopify's flexible and expanding platform will likely help it continue capturing more than its fair share of the industry's growth ahead.
The stock does seem like a riskier investment today, given its net losses, slowing sales, and the potential for weakening e-commerce sales well into 2023. But investors are also getting an extreme discount in exchange for taking on those risks. Down over 70% so far in 2022, the stock might be an attractive addition to your watch list.
