Investing in Shopify (NYSE:SHOP) stock doesn’t make much sense at the moment. That isn’t to say that the eCommerce platform targeted toward small and medium businesses isn’t a good one. It has shown strong fundamental improvement in its early life.
As a business, Shopify is doing quite well. But as 2022 is proving, it requires more than strong current growth to maintain or improve share prices. More succinctly, the market hates bad news.
Bad News
The reason to be wary of Shopify shares boils down to the first sentence of 2022 guidance from the Feb. 16 earnings report. The report stated what the company expects:
“Year-over-year revenue growth to be lower in the first quarter of 2022 and highest in the fourth quarter of 2022 due to three factors. First, we do not expect the COVID-triggered acceleration of eCommerce in the first half of 2021 from lockdowns and government stimulus to repeat in the first half of 2022. Second, our new terms with apps and theme developers cause two differences from last year’s first quarter: the elimination of Shopify’s rev share on partners’ first million dollars of revenue annually reset on January 1st and the shift from gross to net revenue recognition for the sale of themes as a result of revised contract terms with our theme partners.”
That news sent SHOP shares declining rapidly. In the few days subsequent to the release, share prices declined over 30%. They’ve gone even lower since. Investors have shown that they don’t care that Shopify anticipates a strong end to 2022. Covid-19 dynamics aren’t what they were a year ago. And Shopify won’t get a share of the revenue from sellers using its platform on their first $1 million in sales.
None of that is positive. But there is a conundrum here: Shopify had a very strong year in 2021. It is a mature eCommerce company that provided strong results outside of guidance.
Still Strong
As president Harley Finkelstein noted the company has had a stellar two-year run: “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.”
There’s a lot that could be said about that quote. But it’s worth noting that the company is deriving outsized revenue increases on improved merchandise volume. That’s a strong sign which implies that Shopify’s business is improving. After all, if you move twice as much product and receive close to three times the revenue — that’s a positive.
The problem again isn’t that Shopify performed poorly. It reached $1.38 billion in Q4 revenues, up 41% on a year-over-year basis. The problem is that Shopify is maturing. The market will reward it when it provides growth-stock attributes, not value-based attributes. Or at least that’s the way it appears in early 2022.
Relative Position
The funny thing is that investors were willing to pay a lot of money for SHOP stock throughout 2020 and 2021. Value metrics like price-to-earnings (P/E) ratio didn’t matter. Now Shopify has come down in price and its P/E ratio is slightly better than average in its industry.
That’s probably a better way to view Shopify now. It’s maturing and the market could come around. But investors probably won’t be willing to pay significantly more unless Shopify finds growth soon.
What to Do
Shopify is a paradox right now: It is quite strong fundamentally but it seems to be entering a maturing period. The market will punish it for anything that suggests its growth period is over. That’s what happened. So despite the relatively strong business fundamentals, I’d stay away.
If signs emerge that the market is receptive toward Shopify as a maturing eCommerce platform and stock, then the narrative changes.
On the date of publication, Alex Sirois 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.
