What happened
Shares of e-commerce platform company Shopify (SHOP 1.61%) fell 16.5% in February, according to data provided by S&P Global Market Intelligence. Nearly all of the drop happened immediately after the company reported financial results, which is odd considering results beat expectations, and Wall Street generally upgraded its outlook for the stock.
So what
On Feb. 15, Shopify announced financial results for the fourth quarter of 2022. The company reported Q4 revenue of $1.7 billion, whereas the analyst community had only expected revenue of $1.65 billion on average, according to The Fly. Q4 revenue was up 26% year over year, which is still strong considering how much growth it's experienced in recent years.
Wall Street largely praised Shopify's Q4 results, which is surprising considering the negative reaction from the market. Piper Sandler analyst Brent Bracelin cited the company's strong revenue growth when raising his price target from $36 per share to $45 per share. And Credit Suisse analyst Timothy Chiodo referenced its improving profitability as reason for optimism when raising his price target from $34 per share to $40 per share.
Regarding improvements to profitability, Chiodo is talking about relative improvements. In Q4, Shopify's loss from operations was still a staggering $189 million. But that was a marked improvement from its loss from operations of $345 million in the previous quarter.
Shopify co-founder and CEO Tobi Lütke addressed this during the conference call to discuss Q4 results by saying: "Profitability is a consequence of growth and efficiency combined over time. And I don't look toward the quarters."
In other words, Shopify is more concerned with growth right now instead of profitability. And maybe that finally gets to the root of why the market reacted negatively to Shopify stock in February -- its growth forecast for 2023 is modest by Shopify's standards.
Now what
For the first quarter of 2023, Shopify's management is expecting year-over-year revenue growth in the high-teens percentage range, which as the chart below shows would be its second slowest quarter for growth since going public in 2015.
SHOP Revenue (Quarterly YoY Growth) data by YCharts.
Not all is lost, however. For example, Shopify is raising its prices, and these price increases go into effect for its existing customers in Q2 2023. Therefore, it's likely that Q3 and Q4 of 2023 will show better growth, assuming the company retains its customers at the higher price points.
If the price increases and other improvements to the platform reaccelerate Shopify's growth in 2023, the market may react far more positively to the stock in coming months than it did in February.
