• Tue. Nov 29th, 2022

Is it too late to buy Shopify stock?

BySamuel M. Craig

Aug 28, 2022

Shopifyit is (NYSE: SHOP) the stock is down about 80% from its all-time high last November. The Canadian e-commerce services provider was once a hot stock, but bulls have retreated as its growth has slowed in a post-lockdown world. Rising interest rates exacerbated this painful decline.

But after giving up all of its pandemic-era gains, is Shopify finally worth buying out? Let’s take a fresh look at the company to see if it’s too late to buy its shares – or if it’s finally a turnaround.

Image source: Getty Images.

The strengths of Shopify

Shopify’s platform allows merchants to create their own online stores, process payments, fulfill orders, and manage their online marketing campaigns. It helps merchants to build their own online presence without joining crowded third-party marketplace like Amazon (NASDAQ: AMZN) Where eBay. Over the past decade, Shopify’s niche market has evolved into a mainstream market.

At the time of its IPO in 2015, Shopify served 162,261 merchants. Today, it serves “millions” of merchants worldwide. Between 2015 and 2021, its annual revenue grew from $205 million to $4.61 billion, representing a compound annual growth rate (CAGR) of 68%. It also became profitable on a GAAP (Generally Accepted Accounting Principles) basis in 2020 and 2021.

The bulls believe Shopify will continue to grow as merchants revolt against Amazon and other major online marketplaces. They also believe it can retain customers with its integrated Shop Pay payment system, dedicated processing network and its own point-of-sale (POS) systems.

They will also point out that Shopify’s stock looks historically cheap at less than six times this year’s sales. At its peak last November, it was trading at 35 times the sales it would actually generate in 2021.

The glaring weaknesses of Shopify

Shopify’s growth in gross merchandise volume (GMV), gross payment volume (GPV), and revenue accelerated in 2020 as more merchants and shoppers moved online during the pandemic. Stimulus checks also pushed shoppers to make more purchases. However, Shopify’s growth slowed last year as the tailwinds of the pandemic era faded, and that slowdown persisted through the first half of 2022.

Period

FISCAL YEAR 2019

FISCAL YEAR 2020

FISCAL YEAR 2021

1H 2022

GMV Growth (YOY)

49%

96%

47%

13%

GPV Growth (YOY)

55%

110%

59%

25%

Revenue growth (YOY)

47%

86%

57%

19%

Data source: Shopify. YOY = year after year.

Analysts expect Shopify’s revenue to grow 19% for the full year and then 25% to $6.87 billion in 2023. Those growth rates are still robust, but they indicate that Shopify’s “hypergrowth” days are over.

As Shopify’s growth slowed, its gross margins declined as it recognized a higher revenue mix from its low-margin Merchant Solutions segment. Its operating margins also fell this year as it increased investment in logistics, R&D, data, sales and marketing.

Period

FISCAL YEAR 2019

FISCAL YEAR 2020

FISCAL YEAR 2021

1H 2022

Adjusted gross margin

55.7%

53.5%

54.4%

52.5%

Adjusted operating margin

2.9%

14.9%

15.6%

(0.4%)

Data source: Shopify.

It expects that pressure to continue in the second half of the year as it integrates its recent $2.1 billion acquisition of fulfillment technology provider Deliverr.

As a result, analysts expect Shopify’s operating margins to remain negative in 2022 and 2023, and remain unprofitable through at least 2024. This combination of slowing growth and red ink makes Shopify a tough stock to recommend as interest rates continue to climb.

Stick with Other Ecommerce Stocks Instead

Shopify has had a great run during the pandemic, but its future looks cloudy. It still faces competition from similar e-commerce service platforms such as BigCommerce (NASDAQ: BIGC), Adobeit is (NASDAQ: ADBE) Magento and Selz from Amazon, and its price to sales ratio is not that low compared to its industry peers.

For example, the Latin American e-commerce giant MercadoLibre (NASDAQ: MELI) is growing faster than Shopify while increasing gross and operating margins – but it’s trading at just four times this year’s sales. BigCommerce is also expected to generate stronger sales growth than Shopify this year, but it’s trading at less than five times forecast.

Based on these comparisons, it’s certainly not too late to buy Shopify’s stock. Instead, investors should wait to see if its shares fall even further before pulling the trigger.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Leo Sun holds positions at Adobe Inc., Amazon and MercadoLibre. The Motley Fool holds and recommends Adobe Inc., Amazon, BigCommerce Holdings, Inc., MercadoLibre, and Shopify. The Motley Fool recommends eBay and recommends the following options: January 2023 Long Calls at $1,140 on Shopify, January 2024 Long Calls at $420 on Adobe Inc., January 2023 Short Calls at $1,160 on Shopify, Short Calls January 2024 at $430 on Adobe Inc. and Short Calls October 2022 Calls at $50 on eBay. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.