Despite Recent Hiccups, Shopify Remains a Buy for the Long-Haul

  • Shopify (SHOP) faces tough comps in the upcoming quarters
  • SHOP stock is likely to be range-bound this year
  • Its long-term case remains intact, and the pullback offers an attractive entry point
Shopify (SHOP) logo on a smartphone which is next to a miniature shopping cart and miniature cardboard boxes
Source: Burdun Iliya / Shutterstock.com

The turbulence in the stock market is crippling securities front right and center. One of the pandemic darlings, Shopify (NASDAQ:SHOP) stock, has shed over 50% of its value in the past six months. With the normalization of pandemic-led tailwinds, expect moderation in the company’s results. However, the long-term bull case for SHOP stock is still in place and is unlikely to change despite the macro-economic and post-pandemic challenges.

Shopify’s services offered a pertinent and comprehensive solution for those looking to take their businesses online during the pandemic. However, as the threat of the virus eases up, the company expects a slowdown in top-line expansion. Therefore, SHOP stock will also struggle to get going this year.

Nevertheless, its long-term case remains intact as the retail sector evolves digitally. Shopify has positioned itself as a leader in the e-commerce space, which will continue to ride the secular tailwinds in its industry.

SHOP Shopify $705.60

Growth Is Slowing Down

Shopify’s operations soared during the pandemic, as virtually every business was compelled to move online. Shopify offered a tailor-made e-commerce solution that became an instant hit with new and existing businesses in the past couple of years. Consequently, it became decently profitable after posting years of losses.

Its recently released fourth-quarter results showed a 3% top-line beat but were otherwise relatively mild considering earlier quarters’ performances. Additionally, its posted sales growth of 41% on a year-over-year basis has eased considerably from previous quarters. Top-line expansion came in at a whopping 90% from the second quarter of 2020 to the first quarter of 2021.

Moreover, the company’s gross profit margin contracted 1.4% on a year-over-year basis during the fourth quarter. Also, its earnings before interest and taxes (EBIT) margin tanked from 21% to 9.4% during the quarter, from the same period last year. This substantial price correction was linked to “…a significantly greater mix of our lower-margin Merchant Solutions revenue versus the prior year.”

Shopify has clarified that its top and bottom lines will come under pressure with the pandemic fading. It didn’t offer any figures, though, but revenues this year are in for a significant slowdown. Revenue growth will still outpace the e-commerce sector but will perhaps be an unimpressive feat considering the moderation in growth for the overall market.

What Now?

2022 will be challenging for Shopify as it faces tough comparable company analysis (comps). Its share price will be range-bound, and it will be tough to get going. Profits will be key in kick-starting a comeback for the stock, but it seems unlikely.

Furthermore, the company will be spending a truckload of cash on capital expenditures. In 2019, it laid down a five-year plan to spend over $1 billion for its expansion purposes. It expects its capital expenditures to grow to $200 million this year from $51 million in 2021. Additionally, that number will rise to $1 billion in the following two years.

Most of its expenditures are geared towards its “fulfillment service,” which offers a two-day delivery service. If the business can become more vertically integrated, it can effectively improve its quality control, efficiency and lower costs significantly. Therefore, Shopify remains in an excellent position to push forward and achieve incredible things in the coming years.

Final Word on SHOP Stock

The e-commerce sector is experiencing considerable weakness amidst the tumultuous macro-economic backdrop. Shopify, one of the market’s leaders, has seen a major pull-back in its stock price. Moreover, the tailwinds created by the pandemic are fading fast, which means that the company’s growth is likely to slow down in upcoming quarters. Hence, these temporary roadblocks will restrict SHOP stock from breaking out this year.

Nevertheless, the long-term picture for Shopify remains intact. It operates a robust business with an impeccable track record of growing its revenues and earnings. Additionally, it still remains the go-to service for new entrepreneurs to take their operations online. The weakness in its stock price has nothing on its fundamentally solid operations, which have stood the test of time. Considering SHOP stock trades at multi-year lows, canny investors should consider adding the stock to their long-term portfolios.

On the date of publication, Muslim 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.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


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