What happened
Shares of e-commerce disruptor Shopify (SHOP +3.18%) fell 17.9% last month, according to S&P Global Market Intelligence. Shopify's woes from August's disappointing earnings report extended into September thanks to weak economic data for retailers and consumer stocks.
NASDAQ: SHOP
Key Data Points
So what
Things were pretty quiet on the news front for Shopify in September. The biggest headlines were those covering the successful IPO of Klaviyo (KVYO +1.47%), which was earlier funded by Shopify's venture arm. Shopify owned more than 10% of the $8 billion marketing software leader, but the long-anticipated IPO wasn't enough to move the needle.
Image source: Getty Images.
Unfortunately for shareholders, September was a bad month for retail data. Consumers are struggling against a number of macroeconomic forces, and that's translating to a tough environment for direct-to-consumer (D2C) businesses. Shopify generates most of its revenue from D2C transaction payments, so the company's cash flows are jeopardized when e-commerce activity slows down. It's not hard to see how that influences the stock price.
These pressures didn't just emerge last month, either. High inflation and elevated interest rates have created serious challenges for consumers since the start of 2022. Shopify has actually navigated these challenges fairly well, but the trend in financial results is tough to ignore. Its sales growth rate is declining, while gross profit margin is contracting. These could be symptoms of competitive weakness or a difficult economic environment, and recent data points suggest the latter is more likely.
SHOP Revenue (Quarterly YoY Growth) data by YCharts
Shopify's recent results did nothing to comfort investors in the face of weak macro data. It seems that tough times are ahead.
Now what
Concerns about Shopify's short-term performance are completely valid. The Federal Reserve is aggressively combating inflation by hiking interest rates to slow economic activity. High interest rates are likely to persist for at least a few quarters, so it's unlikely that Shopify will have positive external catalysts in the near future. The stock is also fairly expensive, with a price-to-sales ratio above 10 and a forward P/E ratio close to 200. Investors should expect ongoing volatility based on economic conditions and valuation.
All that said, Shopify still has interesting long-term potential. While growth is slowing, its revenue still expanded more than 30% last quarter. The company has taken important steps to cut losses and move closer to profitability. It also launched an integration with Amazon (AMZN +0.34%), which could create upside potential.
Shopify is a cash-flow-positive company with meaningful long-term catalysts. It's worth a look for risk-tolerant growth investors.
