Shopify (SHOP +0.47%) just gave shareholders some reasons to reconsider their investment thesis. The e-commerce platform's mid-February earnings report contained signs of improving growth trends and improving profitability. But the company is still losing money and burning through cash.
Does the operating update signal that it's time to consider buying Shopify stock following its slump in 2022? Or are there better options for an investor seeking exposure to e-commerce?
Accelerating growth
The company's fourth-quarter report was impressive from a growth standpoint. Sales volumes were up 17% after accounting for currency exchange shifts, representing an acceleration compared to the prior quarter's 11% increase.
NASDAQ: SHOP
Key Data Points
Its complementary business lines, including payments processing and merchant services, also expanded at a faster rate. Altogether, revenue was up 28% compared to the prior quarter's 24% increase. These results beat the expectations of most Wall Street pros. "The strength of our ... performance is a testament to the resilience of our merchants," President Harley Finkelstein said in a press release.
It's still losing money
Unfortunately, investors didn't see much progress on the financial front. Gross profit margin fell to 46% of sales from 50% a year ago, mainly thanks to growth in the payments processing segment. This division isn't as profitable as Shopify's core platform unit, but is expanding more quickly than the rest of the business.
Shopify lost $189 million, or 11% of sales, in the fourth quarter. That's an improvement over the prior quarter's 25%, but it is still a sharp decline compared to 2021, when the company was generating modest profits.
SHOP operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Shopify lost over $800 million for the full 2022 year, or 15% of revenue. The company generated a 6% operating profit in the prior year but is still working to bring costs back in line with its slower-than-expected growth.
Outlook and value
Shopify's outlook for 2023 was a mixed bag. Management is predicting only a minor slowdown, with revenue growth landing in the mid-teen percentages compared to 21% this past year. But there's no call for a dramatic return to positive earnings, either. Gross profit margin will be only slightly higher than the 46% that it achieved in fourth quarter, executives said.
On the bright side, Shopify is winning market share in e-commerce, which grew at a surprisingly strong pace through late 2022. The company is taking steps toward achieving profitability again, too, including raising the fees it charges to merchants.
Yet big risks include how merchants respond to those higher rates in 2023 and whether consumer spending slows down sharply. Shopify's conservative outlook seems to reflect weaker industry trends here and a tougher selling environment overall.
But those are short-term concerns that don't threaten the wider investment picture. Sure, shareholders were hoping that the company would be more aggressive in shoring up its finances in 2023. Yet its expansion strategy seems to be working both in the core business and in its subscription services.
Considering the stock's price slump since early 2022, investors are getting a solid value for exposure to this business. You can own Shopify stock for about 13 times sales today, or less than half of its peak valuation.
Cautious investors might want to pass on that discount while they wait for a return of sustainable profits. If you don't mind the volatility, though, then the growth stock looks attractive today.
