Is Shopify (NYSE:SHOP) in trouble? Judging by the wretched performance of SHOP stock since the company’s most recent earnings report, the answer appears to be a resounding “yes.”
Shopify was trading for around $900 per share before the company reported fourth-quarter and full-year 2021 results in mid-February. And while the company disclosed improved sales figures, it sent investors scurrying with its 2022 guidance that projected greater capital spending.
Since that earnings report, SHOP stock has dropped more than 35%, and trades at less than $555 per share. That’s a big drop in just a short time.
And it’s part of a bigger picture. Shopify stock is down more than 60% on year-to-date basis, with little indication that it will rebound any time soon. DA Davidson analyst Tom Forte recently revised his price target for SHOP stock to $800 from $1,400, citing management’s accelerated spending plans.
SHOP Stock at a Glance
Shopify is a Canadian company that helps global online businesses operate. It operates a subscription-based service that lets users set up and manage their e-commerce. The company was founded in 2006, but didn’t go public until May 2015.
And by all accounts, SHOP stock has been a huge winner. The stock was offered at $17 when it went public and even with its huge 2022 declines, it’s provided early investors with gains of more than 2,000% at this writing.
Fourth-quarter revenue came in at $1.38 billion, which was a 41% increase from the same quarter the year before. Adjusted gross profit was $700.6 million, a gain from $510.6 million in Q4 of 2020.
SHOP posted a net loss for the quarter of $172.8 million, or $1.36 per share. That was much worse than net income in Q4 2020 of $198.8 million, or $1.58 per share. The comparable loss wasn’t a huge surprise considering how much Shopify’s business grew in 2020 in the thick of the Covid-19 pandemic. As businesses reopened in late 2021, SHOP stock faced some huge comparable numbers.
“The last two years have been extraordinary,” Shopify President Harley Finkelstein said in a statement. “We nearly tripled revenue, more than doubled GMV and the Shopify team, and the number of merchants using Shopify is nearly twice as big as 2019 levels. We are emerging from the sprint of these last two years even stronger and more ambitious, since the accelerated leap into digital commerce means we can go farther faster for merchants and buyers alike.”
With that growth comes more spending. Shopify says that its marketing expenses doubled to more than $275 million. Research and development costs also doubled to nearly $274 million.
Those kind of expenses are accelerating. Shopify announced that it would increase spending on its fulfillment network in 2022, and is expected to spend about $1 billion in capital expenditures in 2023 and 2024.
Huge Challenges, Huge Opportunities
E-commerce is one of the most interesting and exciting growth opportunities. But its not for the faint of heart.
A report from eMarketer projects that online retail sales will total $6.17 trillion by next year. E-commerce will comprise more than 22% of all total sales. China is by far the biggest ecommerce market, with more than $2 trillion in sales 2021. The U.S. is the No. 2 e-commerce market, at only a third of China’s sales.
Shopify, meanwhile, has only a tiny fraction of that market. In 2020 it was the No. 18 global e-commerce company with sales of $2.93 billion. In comparison, the No. 1 company is Amazon (NASDAQ:AMZN), which had sales of more than $38 billion.
How can SHOP stock close that gap with the Amazons of the world?
One possibility could be Shopify’s recently announced partnership with fellow Canadian firm Shippo, a shipping platform. In a news release, the company said the Shopify will “leverage Shippo to make Shopify Shipping available in select European markets, where merchants can now access shipping directly from the Shopify admin.”
The arrangement can help Shopify merchants solve what’s often the biggest challenge in e-commerce — getting goods to a customer and completing the sale. Amazon created a vast network of delivery drivers and warehouses for just this reason.
The Bottom Line
If you bought SHOP stock early, you’re likely still pretty happy with the returns, even as Shopify faltered in the last few months.
Its certainly possible that Shopify will return to its growth path at some point. But the massive expenditures ahead – combined with Amazon’s continued dominance in the ecommerce space – means Shopify investors will have to show some patience.
If you’re looking for short-term gains, SHOP stock isn’t the place to find it.
On the date of publication, Patrick Sanders 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.
