Canadian e-commerce giant Shopify (NYSE:SHOP) was a darling of the pandemic era. Between its March 2020 low and all-time high of $1,762.92, made in November, SHOP stock rose 477%.
Analysts and investors were extremely bullish on the suite of services Shopify provides to online retailers, which includes payment systems, marketing, shipping and customer engagement tools. Such tools were in high demand as Covid-19 lockdowns shuttered many brick-and-mortar stores and forced more operations online.
But investor sentiment in SHOP stock has turned bearish amid concerns over slowing growth, rising competition and uneven financial results. With SHOP stock down 46% so far this year and 58% below its peak, it looks like Shopify’s best days are now behind it.
Shopify Faces Rising Competition
SHOP stock nose-dived recently when it was announced that Google parent company Alphabet (NASDAQ:GOOG, GOOGL) is entering the same space in which Shopify competes, helping outside companies improve their e-commerce business and achieve efficiencies with their deliveries to customers. The offering from Alphabet is called “Last Mile Fleet Solution,” and with it, the Google parent becomes the latest juggernaut to enter what is becoming a very crowded field.
Already, Shopify is up against formidable competition from e-commerce giant Amazon (NASDAQ:AMZN) and retailer Walmart (NYSE:WMT), as well as a host of startups that are aiming to take its market share.
Evidence is mounting that the rising number of competitors is taking a toll on Shopify’s business. The company’s fourth-quarter financial results showed revenue grew 41% year over year to $1.38 billion. However, Shopify’s adjusted earnings per share declined 14% from a year ago to $1.36.
The company declined to provide any forward guidance, except to say that it expects growth this year to be substantially lower than in 2021. The day the Q4 results were announced, SHOP stock fell 16%. A week later, the share price was down around 30%. And, despite a few short-lived rallies, the stock has continued to slump.
Don’t Count on Digital Ads to Save Shopify
With demand for its core services waning as retailers reopen their stores and competition rising, some analysts see hope for Shopify in the addition of digital advertisements.
Currently, Shopify has no digital ad business to speak of. However, with more than 1 million retailers as its customers, many analysts say digital ads would be a no-brainer for Shopify.
The company can easily leverage sales conversions with its ShopPay payment processor. And with most of the needed pieces and a captive customer base already in place, Shopify would be able to quickly build and scale a digital advertising business, say proponents of the idea.
So far, Shopify hasn’t said much about a potential digital advertising business. Instead, the company is trying a myriad of different strategies to boost its business and get growth back on track. These include forming numerous partnerships with other tech giants such as Meta Platforms (NASDAQ:FB), spending $1 billion over the next two years to overhaul its fulfillment network, launching a platform to sell non-fungible tokens (NFTs) and targeting social media influencers.
While ambitious, some analysts have dismissed Shopify’s efforts as scattershot and questioned their potential impact on the company’s long-term growth.
The Bottom Line on SHOP Stock
Things have taken a turn for the worse when it comes to Shopify and SHOP stock. Like a lot of high-valued growth stocks, sentiment toward Shopify has soured in recent months, pushing its share price down sharply. And it doesn’t look like the stock will rebound anytime soon.
Waning demand, slowing growth, increased competition and an unfocused recovery plan create an air of uncertainty around Shopify. Given all these issues and the falling share price, investors should avoid this troubled e-commerce company. SHOP stock is not a buy.
On the date of publication, Joel Baglole held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
