After hitting a low of $23.60 in 2022, Shopify's (SHOP 3.75%) stock has staged a remarkable recovery in the last few months, up roughly 135% as of this writing.

Judging from the stock's performance, investors are probably more optimistic about Shopify's recovery after a tough 2022. But is the worst over for the company?

Employees use the desktop computer.

Image source: Getty Images.

Shopify had a tough time in 2022

2022 was a brutal year for Shopify's investors. In 2021, the company was trading at a market capitalization of more than $200 billion. But less than a year later, the market cap fell below $35 billion, erasing more than 80% of investors' wealth.

The drastic fall in share price is not without reason. Fundamentally, Shopify was facing significant headwinds in 2022 after enjoying two years of COVID-19 tailwinds. Customers returning to pre-pandemic lifestyles impacted all e-commerce companies, including Shopify. It didn't help that Shopify faced external impacts from a series of macro events like the war in Ukraine, high inflation, and high interest rates in 2022.

As a result, Shopify grew much slower in 2022 than in previous years. For instance, gross merchandise value (GMV) grew just 12% in 2022 compared to 47% in 2021. Similarly, the revenue growth rate fell from 57% in 2021 to 21% in 2022. Worst of all, operating income went from a positive $269 million in 2021 to a negative $822 million in 2022.

A 21% revenue growth rate is nothing to be ashamed of. Still, investors were expecting more from the growth company to justify its sky-high price-to-sales ratio of more than 30 times before the subsequent price correction. And while management responded by cutting its staff by 10% in 2022 (and another 20% in 2023), it further added to investors' pessimism about Shopify's prospects in the future.

Shopify's financial performance has been improving lately

Shopify's 2022 performance was largely disappointing for investors. Fortunately, there are signs that it has reached a bottom.

First and foremost, Shopify's GMV growth has steadily improved over the last few quarters after bottoming at 11% growth in the second and third quarters of 2023. GMV growth reached13%, 15%, and 17% in the next three quarters. While the 17% growth rate is nowhere near the 47% achieved in 2021, the steadily improving trend gives investors hope that the worst is probably over.

Similarly, the revenue growth rate has improved, reaching a high of 31% in the second quarter of 2023, thanks to the growing GMV and the increase in subscription pricing. Furthermore, Shopify has delivered three consecutive quarters of positive cash flow, even though it is still unprofitable on a net profit basis.

Shopify also guided for revenue to grow at a low-20s percentage rate and free cash flow to be positive in the third quarter of 2023. While the guided revenue growth rate lags that of the second quarter, it is still acceptable.

In all, there are clear signs that green shoots are appearing. What Shopify needs to do now is sustain these improvements in the coming quarters.

What does it mean for investors?

Shopify had a difficult time in 2022, but the worst seems to be over as it reported some improving growth metrics and improving cash flow.

Still, it is too early to get overly excited about the company and rush to buy the stock. It might have reached a bottom, but investors need more evidence of the sustainability of the recovery. Ideally, you want to see a few more consecutive quarters of solid (and improving) growth in GMV, revenue, and sustainable cash flow.

It's prudent to make your next move only when those green lights appear.