Investors in Shopify (SHOP 1.11%), a leading e-commerce company, have had a nerve-racking ride lately. The pandemic propelled the stock to an all-time high of $169 in 2021, but the economy's reopening brought it back to the pre-pandemic level of $24 by 2022.
Since then, Shopify's stock price has recovered to $41. Investors who missed the bottom are considering buying into the stock. But is now the best time to buy it to ride the price recovery? Let's explore this further.
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Shopify is facing a tough time in the near term
Shopify has been the poster child of a successful growth company. Since it went public in 2015, revenue has grown more than 20-fold to $4.6 billion in 2021, thanks to the success of its e-commerce software and service offerings.
But 2022 was a tough year for the company. Growth slowed remarkably, with gross merchandise value (GMV) and revenue growing by 12% and 21%, respectively. Comparatively, GMV and revenue grew by 47% and 57% in the previous year. The post-pandemic reopening, weak global economy, and high inflation impacted consumer spending.
Moreover, the tech company admitted that it was overly optimistic with its growth plan for the next few years, resulting in a massive layoff of 10% of its workforce. The firing also suggested that Shopify was not expecting to return to its hyper-growth rate soon. In fact, it guided revenue to grow at high-teen percentages in the first quarter of 2023, even lower than the 2022 revenue growth rate.
It does not help that Shopify recently changed its chief operating officer (COO) and chief financial officer (CFO). The shuffle meant the company has almost completely overhauled its management teams in the last two years, leaving only the CEO and president unchanged. While it's not uncommon for a company to recruit new blood as it expands, the magnitude of such a change introduced another layer of uncertainty amid this period of slower growth.
But Shopify's long-term tailwinds remain intact
Shopify's short-term prospects may look drab, but its longer-term outlook remains bright. To start, Shopify's market share remains low in the U.S. (less than 2%). Moreover, the U.S. e-commerce sales ($870 billion in 2021) were just a fraction of the global e-commerce industry's $4.9 trillion. In short, the tech company has just touched the tip of the iceberg.
Shopify knows the vast opportunity ahead and -- despite its recent slowdown -- sustained its investment to grow its market share. For example, it paid $2.1 billion to acquire Deliverr, which will help offer its customers an end-to-end logistics service.
The e-commerce solution provider is also moving deeper into the offline retail market via Shopify point-of-sale (POS) services, which include hardware and software solutions. Using Shopify's tools, merchants can seamlessly accept offline payments (including Shopify payments) anywhere, and those transactions will integrate seamlessly into Shopify's online platform. In short, merchants will need just one operating platform for online and offline sales.
And that's not all. Shopify is taking its tools and experience into the global markets. For example, Shopify payment is in 22 countries, Shopify POS is in 14 countries, and Shopify Shipping is in seven countries. By extending these services beyond its core markets, the tech company is positioning itself for overseas expansion. For perspective, Shopify enabled $28 billion of cross-border sales for merchants in 2022.
Suffice it to say that Shopify has a massive growth runway ahead of it.
Is Shopify a buy?
In 2022, Shopify enabled close to $200 billion worth of GMV, putting it in a league with some of the largest retail companies, like Amazon and Walmart. With such a size, it's not surprising that its growth rate was slowing. Besides, it faced external headwinds, such as a weak economy and high inflation.
Still, investors have good reasons to believe that Shopify will continue to grow for many years as it penetrates deeper into the retail industry, albeit at a lower growth rate.
So it all boils down to whether investors have the right investment horizon and can handle the stock's volatility. For those with at least a five-year investment horizon and the gut to weather the short-term volatility (both in business and stock performance), holding some stock will not be such a bad idea. But for the rest, it's best to look elsewhere.
