Shopify's (SHOP 2.27%) stock price dropped 16% on Feb. 16 after it posted its fourth-quarter earnings report. The e-commerce services provider's revenue rose 26% year over year to $1.73 billion, which beat analysts' estimates by $80 million. Its adjusted net income fell 47% to $91 million, or $0.07 per share, but still topped the consensus forecast by nine cents.
For the full year, Shopify's revenue rose 21% to $5.60 billion, but its adjusted net income plummeted 94% to $48 million. That represented a significant slowdown from 2021, when its revenue and adjusted net income grew 57% and 66%, respectively. That's why investors weren't too impressed by Shopify's fourth-quarter earnings beat, and why its stock remains down more than 30% over the past 12 months. But could the company's prospects brighten by the end of 2023?
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Why is Shopify's growth slowing down?
Shopify's tools enable merchants to create their own e-commerce websites, process payments, fulfill orders, and manage their marketing campaigns. That flexibility makes it an attractive alternative to joining a massive third-party marketplace like Amazon.
Shopify's growth accelerated during the pandemic as more people stayed at home and shopped online. Brick-and-mortar businesses also scrambled to open new online stores to cope with the lockdowns. But just like Amazon and other e-commerce companies, Shopify suffered a tough post-pandemic slowdown as more brick-and-mortar businesses reopened.
Those difficult year-over-year comparisons were exacerbated by inflation over the past year, which curbed consumer spending on discretionary goods. During Shopify's fourth-quarter conference call, CFO Jeff Hoffmeister admitted that "inflation remains elevated" and said the company would remain "mindful" of the near-term macroeconomic challenges.
Shopify laid off about 10% of its workforce last year as it integrated its acquisition of the logistics technology company Deliverr, but it doesn't plan to cut any more jobs this year. It plans to hire fewer employees, but it also intends to ramp up its investments in its logistics, digital payments, and enterprise-facing features to drive its long-term expansion.
How long will its deceleration last?
Shopify expects its revenue to rise by a "high-teen" percentage year over year in the first quarter of 2023, which would represent a deceleration from the fourth quarter as it continues to face tough macro headwinds.
Competition from a growing number of rivals -- including Amazon's "Buy with Prime" tools for independent merchants, BigCommerce and Adobe Commerce -- and currency headwinds (which shaved two percentage points off its full-year revenue growth in 2022) could exacerbate that slowdown.
And even as Shopify's growth cools off, its margins are shrinking as it continues to invest in the expansion of its ecosystem while recognizing a higher mix of lower-margin revenues from Shopify Payments and Deliverr. That's why its adjusted operating margin fell from 16% in 2021 to 0.1% in 2022, and that pressure could persist throughout 2023.
Analysts expect Shopify's revenue to only rise 19% to $6.7 billion this year as its adjusted earnings stay roughly flat. Yet that still means Shopify would be growing at a faster clip than Amazon and BigCommerce, which are expected to generate 8% and 14% revenue growth, respectively, this year.
So where will Shopify's stock be in a year?
Shopify certainly isn't doomed, but its biggest problem is its valuation. At $44 a share, it still has an enterprise value of $53.6 billion -- or 8 times the revenue it's expected to generate in 2023. Amazon trades at just 2 times this year's sales, while BigCommerce trades at 3 times its 2023 sales.
Shopify is trading at a premium to its peers because it's still priced as a disruptive growth stock. But its business model isn't unique anymore -- and its growth probably won't accelerate again this year. Shopify still has a promising future, but I don't expect the bulls to rush back unless its growth accelerates or it trades at much lower valuations. Based on those uncertainties, I expect Shopify's stock to stagnate and underperform the broader market for at least the next 12 months.
