Why Investors Should Wait For A Drop In Shopify Stock

Despite recently posting great quarterly results, Shopify (NYSE:SHOP) stock has been declining for the past few months. Of course, this is surprising because Shopify was one of the big winners during the novel coronavirus pandemic and is now one of the biggest e-commerce enterprises in the world. However, now the main concern looks to be slowing growth.

Image of a shopping cart toy on a wooden desk carrying a mobile phone that features the Shopy (SHOP) logo on it

Source: justplay1412 / Shutterstock.com

As mentioned already, Shopify’s sales and net income exponentially grew during the pandemic; And looking back, it truly should come as no surprise. Online e-commerce became the natural alternative to traditional retail avenues when people feared venturing outside their doors. In turn, as more people shopped online, the more it helped Shopify’s sales. By the end of fiscal year 2020, Shopify had raked in more than $2.9 billion in revenue — an 86% boost year-over-year (YOY).

Furthermore, 2021 has been a prime example of just how quick the company’s growth has been. Most recently, Shopify’s fourth quarter of FY2021 revenue came in at $1.38 billion, a 41% increase from the year-ago period. And for the full year, the firm said revenue reached $4.6 billion — good for a 57% jump YOY.

Meanwhile, guidance given by the company was quite bearish, which is why investors ran for cover. Specifically, Shopify said it expects “year-over-year revenue growth to be lower in the first quarter of 2022 and highest in the fourth quarter of 2022.”

Despite shares losing steam, though, SHOP stock is still trading at a forward price-earnings (P/E) ratio of 285.71. So, while SHOP stock is a risky company with a muted outlook, it still has high valuations. That said, let’s take a closer look.

SHOP Stock Slows Down as Pandemic Recedes

At its core, Shopify is an e-commerce platform that enables businesses to create an online marketplace. It provides many features and tools, including adding payment gateways, shipping carriers, creative options and more.

Initially, Shopify launched as an online snowboard retailer but has since expanded its product line to include apparel, jewelry, electronics, among others. And due to the recent secular shift toward digital shopping, the company quickly grew, and this rise was only amplified thanks to the pandemic. However, as the world goes back to normal, we’re seeing e-commerce stocks giving away gains.

Of course, there are also wider issues to blame. No one could’ve predicted the Russian invasion of Ukraine or the tech selloff at the start of the year. Additionally, the Federal Reserve is looking to calm inflation through interest rate hikes. In fact, we already have had the first of these seven hikes. In turn, these factors are bearing down on growth stocks — and SHOP stock is no different.

Therefore, you cannot blame management for Shopify stock’s recent poor performance. The company reported some bright numbers in its latest quarterly report. For example, Shopify’s global sales hit $6.3 billion for the Black Friday to Cyber Monday period, up from $5.1 billion in 2020. Overall sales have increased 57% over last year, a solid number.

However, the major issue seems to be the future of the company. As I mentioned already, management did not offer any numbers but acknowledged that revenue growth would be the highest in the year’s fourth quarter and slowest in the first. Shopify is also investing aggressively in the company’s operations, which will also weigh down on its bottom line.

Nonetheless, Shopify continues to invest in its platform. Areas of focus include improving the Shopify App and expanding its network for delivering products. So, Shopify is already set to spend a lot of money. And this is expected to escalate significantly in the coming years, with $1 billion in capital expenditures already planned for 2023 and 2024 to build its U.S. fulfillment network.

What Is the Future for Shopify?

Collectively, it can be easy to forget that Shopify is still growing. More specifically, it is not a mature enterprise at this point. Therefore, the company will need to continue investing in its future. And that is why it invests in infrastructure and leveraging partnerships for future growth.

For example, Shopify has announced that they have created a partnership with JD.com (NASDAQ:JD) on their Marketplace platform for third-party sellers. This move gives Shopify access to one of the biggest e-commerce consumer bases in the world. Specifically, JD reported it had nearly 570 million active customers as of the last quarter, rising 21% year on year. In contrast, Shopify has more than 2 million active users and is constantly growing.

Apart from working with JD, Shopify also has partnerships with some of the biggest companies in the world, including Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Meta (NASDAQ:FB) and Walmart (NYSE:WMT).

Is SHOP Stock a Buy?

Overall, Shopify is a much-loved e-commerce stock among investors. Its asset-light and solid partnerships provide it with stability and the ability for growth. It has also built a strong brand as quickly as — or even faster than — Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), which have been around for much longer.

However, the company is suffering through a rough patch at the moment. Growth is slowing down, and the company needs to invest in operations aggressively to keep revenue ticking. And despite SHOP stock losing steam in the last few months, it is still trading at very high multiples.

Therefore, this is one stock investors should wait on but continue watching moving forward.

On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


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