Investors don't know quite what to make of Shopify (SHOP -2.37%) stock right now. The company targets a massive market that spans e-commerce and in-person retailing. Yet today it is losing money and it faces increasing competitive challenges. These clashing ideas help explain why the stock was so volatile over the past year.
Against that backdrop, let's take a closer look at the key factors supporting investors' bearish and bullish theses for Shopify stock.
The bearish outlook
The bearish outlook is holding more sway on Wall Street these days. Shopify just posted significant operating losses for the 2022 year, after all, as operating loss landed at $822 million compared to a $270 million gain in 2021. Sales trends slowed as well. Revenue was up 23% after currency swings are adjusted for, compared to a 57% spike in 2021. Investors are bracing for a further slowdown ahead as revenue growth is projected to fall to 19% in 2023.
It is easy to see how these key metrics might remain weak for years to come. Shopify isn't the only platform with robust tools that help merchants sell their products online. And management's stumbles in the past year have highlighted some of the big financial risks involved in being too optimistic about market share and growth trends. At the same time, growth will be harder to achieve in an era of tightening enterprise budgets.
The bullish case
Bears might be too focused on the growth hangover from the pandemic to see the brighter big picture. Shopify's business is far larger than it was before the pandemic, with revenue currently near $6 billion compared to around $1.5 billion in 2019. Its services are clearly resonating with merchants, too, as about 10% of e-commerce in the core U.S. market was transacted through Shopify's platform in 2022.
Management sees a clear path toward expanding that market share, too, in part by adding more services, like fulfillment, payment processing, and business credit.
Meanwhile, successes here are lifting Shopify's position in traditional retailing. It's these additions that will likely make the company an indispensable partner for many large and small enterprises. "We continue to build mission-critical solutions to power the future of commerce," executives said in mid-February.
Buy now or wait?
As it currently accounts for less than 5% of the total addressable market that management sees, Shopify clearly has the potential to dramatically expand on the nearly $7 billion in annual sales that Wall Street expects this year. Losses are projected to end in 2023 as well, thanks in part to aggressive cost cuts. Progress on these points would likely lift the stock, especially given that share prices declined so much over the past year.
On the other hand, investors are still paying 10 times annual sales for Shopify stock today. That's a comparable valuation to the one that Microsoft is attracting right now.
As a result, Shopify appears to be a risky stock that's exposed to weak economic growth and declining valuations in the tech world. The flip side of this equation is that shares should trounce the market once the current demand slowdown ends. But investors should be prepared for more volatility in the meantime as they wait for clarity around Shopify's growth and earnings potential.
