Like other e-commerce businesses, Shopify (SHOP 2.27%) benefited from a huge surge in online shopping that occurred during the worst of the coronavirus pandemic. Sales were skyrocketing, and the company was posting positive operating profits for several quarters.
However, with the uncertain economic environment and inflation on everyone's minds now, Shopify's growth has moderated and its shares have retreated sharply from their 2021 peak. Yet, the stock has still produced a remarkable 300% return over the past five years. This means a $1,000 investment in Shopify back then would be worth more than $4,000 today.
Past returns are wonderful, but what should investors do about this stock now? Let's take a closer look at this top e-commerce business.
Sizing up the latest numbers
Shopify, which provides services that make it incredibly easy and seamless for businesses to start selling online, has seen its growth slow. This is especially the case when compared to a couple of years ago. But the numbers are still impressive. In the latest quarter (Q1 2023, ended March 31), gross merchandise volume (GMV) increased 15% year over year to $49.6 billion.
"We achieved this GMV strength primarily through more resilient consumer spend, with strength in Europe being particularly notable, existing merchant same-store sales growth, and growth in our merchant base," CFO Jeff Hoffmeister stated on the first-quarter earnings call. Those are clearly all positive trends.
Revenue was up 25% during the period, driven by a record attach rate of 3.04%. The attach rate, often called a take rate, is calculated as revenue divided by GMV, essentially measuring how much of the dollar volume on its platform Shopify gets to keep. The company noted that merchants are buying more services and solutions.
The leadership team is trying to temper its expectations. "Our perspective on the rest of the year remains cautious and assumes that inflation remains elevated, which may pressure consumer spending," management said in its earnings presentation. Nonetheless, executives are optimistic enough to forecast a similar rate of revenue growth in the current quarter to what was achieved in Q1.
Some other things to keep in mind
It's certainly encouraging to see Shopify put up solid double-digit GMV and revenue growth, particularly at a time when inflation is leading to lower discretionary spending power for consumers. The company's strong momentum could be enough to keep shareholders happy.
But investors should also pay attention to another important financial figure. In the most recent quarter, Shopify's operating loss was $193 million, which was roughly double the operating loss of $98 million in Q1 2022. This happened despite revenue rising. That's obviously not a good result for a company that should be inching closer to profitability on a GAAP basis as it achieves greater scale.
Shopify did tout the fact that it was able to generate positive free cash flow of $86 million. But because this metric adds back Shopify's $135 million of stock-based compensation since it's a non-cash expense, I'm not really buying it. Investors should be paying attention to these numbers going forward.
Nonetheless, the company's stellar growth might be enough of a reason to want to own shares. And there's a long runway for Shopify to continue its monster gains. According to data provided by the Federal Reserve Bank of St. Louis, online shopping only accounted for 15.1% of all retail sales in Q1 2023. And according to Cloudways, a cloud infrastructure company, Shopify has the leading market share (25%) of e-commerce platforms in the U.S.
All of this puts Shopify in a prime position to benefit as more shopping moves to digital channels.
What should investors do?
Those who are enamored with Shopify's growth might want to consider buying the stock today even though positive profits seem like a long way off. The shares are up 70% so far in 2023, and they trade at a price-to-sales (P/S) multiple of 12.7. That's not cheap by any stretch of the imagination, but it is well below the trailing-five-year average of 28.9.
