Shopify (SHOP 1.11%) has taken investors on a wild ride since its initial public offering (IPO). The e-commerce services provider went public at a split-adjusted price of $1.70 per share on May 21, 2015; skyrocketed to an all-time high of $169.06 on Nov. 19, 2021, at the peak of the buying frenzy in growth stocks, but now trades at about $46.
A $1,000 investment in its IPO would have grown to nearly $100,000 before shrinking back to about $27,000 today. Nevertheless, a 27-bagger gain in just under eight years still easily beats the S&P 500's gain of 94% during the same period.
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Shopify's stock initially caught fire because investors were impressed by its ability to disrupt Amazon (AMZN 3.43%) and other online retailers with its self-service e-commerce tools. They enable smaller merchants to set up their own online stores, process payments, fulfill orders, and launch marketing campaigns. Its accelerating growth throughout the pandemic attracted even more attention from the bulls.
Unfortunately, that bullish stampede drove Shopify's valuations to unsustainable levels and set it up for tough year-over-year comparisons after the pandemic eased. Inflation, which broadly curbed consumer spending on discretionary goods, exacerbated that slowdown.
Most investors are likely familiar with that story, but today I'll focus on three lesser-known aspects of Shopify's business that might just change your opinion about its future.
1. It's highly dependent on Facebook and Instagram
Many of Shopify's merchants advertise their products on social media platforms to drive more shoppers to their online stores. That raises a red flag, since Apple's (AAPL -0.35%) privacy changes in iOS -- which started in 2021 -- allowed its users to opt out of data-tracking features in individual apps. That shift made it difficult for Meta Platforms' (META 0.43%) Facebook and Instagram to craft effective targeted ads.
Back in 2020, Shopify launched a dedicated Facebook Shops Channel, which enabled its merchants to customize their storefronts within Facebook and Instagram while managing their products, inventories, and fulfillment through Shopify. In 2021, it tethered its Shop Pay digital payments platform to Facebook and Instagram.
Shopify doesn't regularly disclose its exposure to Facebook and Instagram. But according to NerdWallet's Fundera, 30% of all social media visits to Shopify's stores still originate from Facebook, while approximately 29,000 Shopify stores sell their products on Instagram. In short, any major setbacks for Meta's advertising platforms could throttle Shopify's growth.
2. It operates its own shopping app
One way that Shopify could pivot away from Meta is to expand its Shop app, which was launched in 2020 as a rebranded version of its delivery-tracking Arrive app.
Shop is a consumer-facing marketplace that makes it easier for consumers to find local Shopify businesses on a unified listings platform. Its home page also displays a feed of recommended products based on past purchases, and shoppers can directly make purchases within the app through Shop Pay.
At the time of its launch, Shopify said the Shop App served about 16 million monthly active users (MAUs), which grew to 19 million MAUs in 2021. It hasn't updated its MAU count since then, but the long-term growth of Shop could enable it to challenge Amazon and other shopping apps while reducing its dependence on sprawling social media platforms.
3. Amazon is still a looming threat
Shopify might be an appealing option for merchants who don't want to join Amazon's massive third-party marketplace, but Amazon still represents a looming threat.
Amazon shut down its Webstore platform, which directly competed against Shopify, in 2015. But in 2021, it quietly acquired Shopify's Australian competitor Selz. In 2022, it launched Buy With Prime, which allows independent third-party merchants to directly tether themselves to its Prime ecosystem with one-click checkout buttons.
That move was so alarming that Shopify explicitly warned its sellers that adding Amazon's buttons to their stores would constitute a violation of its terms of service, which required its merchants to exclusively process their payments through Shop Pay. That reaction suggests that Buy With Prime could represent a major long-term threat to Shopify since Amazon's Prime ecosystem has already locked in more than 200 million paid subscribers across the world.
What do these facts mean for Shopify's future?
Analysts expect Shopify's revenue to rise 19% this year, but that would represent a slowdown from its 21% growth in 2022 and 57% growth in 2020. Its adjusted earnings are also expected to decline 25% as it ramps up its investments.
That outlook isn't too bright for a stock that still trades at 8 times this year's sales. By comparison, the Latin American e-commerce giant MercadoLibre (MELI 3.09%) -- which is expected to grow its revenue and adjusted earnings by 24% and 81%, respectively, this year -- trades at just five times this year's sales.
Furthermore, Meta's issues with Apple and Amazon's strategies could generate unpredictable headwinds for Shopify this year. Its Shop app could address both problems, but it's still too early to tell if it can gain enough traction to make a difference. So for now, Shopify is still a risky investment, and its valuation is still a bit frothy relative to its near-term growth.
