I have been wrong about Shopify (NASDAQ:SHOP) stock for a long time. But I take no pleasure in the stock’s recent fall. Shares that sold for $1,690 each as recently as November opened March 14 at about $544. They’ve been hit almost as bad as Alibaba Group Holding (NASDAQ:BABA).
I’ve dissed Shopify. I’ve recommended Alibaba. That’s a long way of saying humility is required. Trends can be missed. They can also reverse. What matters most is what comes next.
What’s next for Shopify?
Shopify Reset
Shopify, based in Ottawa, is built around e-commerce software that lets anyone set themselves up with an online store. It has expanded into e-commerce infrastructure, like payments and shipping.
What finally slowed Shopify was its dependence on Meta Platforms (NASDAQ:FB), specifically the Application Program Interfaces (API) that connect businesses with potential customers. Apple (NASDAQ:AAPL) broke this relationship with its privacy changes. It also broke Shopify.
This didn’t break online advertising. Alphabet (NASDAQ:GOOGL) and Amazon.Com (NASDAQ:AMZN) have the scale needed to deliver specific targeting without Meta’s huge database. Shopify may have enough merchants to do the same, but it lacks the software, and central connection to customers.
Amazon vs. Shopify
Amazon has long been Shopify’s Moby Dick. Shopify likes to say it’s the second-largest e-commerce company, after Amazon. But it lacks Amazon’s cloud and scale. Most of its merchants are tiny.
That has always scared me off Shopify stock. Where it proved me wrong was in its “merchant solutions,” which include payment processing, order fulfillment services, and loans. This now represents almost 75% of the company’s revenue, according to its most recent quarterly report.
But as with Amazon, physical fulfillment doesn’t scale as well as software. While Shopify’s merchant services revenue grew 61% from 2020 to 2021, its costs for that revenue grew 56%. Many of these are fixed costs. Since Shopify is dealing with small merchants, there’s also higher risk. Loan losses more than doubled, year over year, in the fourth quarter. Adjusted operating income fell to $130 million, 9% of revenue, from $200 million or 20% of revenue the year before.
Can Shopify Come Back?
Analysts seem convinced Shopify can come back.
They say a new alliance with privately-held Shippo will boost its fulfillment services, especially in Europe. There’s a new LinkPop feature that lets users make purchases with only three clicks, directly from a personal biography. Being based in Canada also lets Shopify get away with paying lower salaries than it would in California.
Analysts insist that e-commerce is continuing to grow, that Shopify offers a Software as a Service (SaaS) model that will naturally benefit. Half of the 27 analysts following Shopify still like the stock, with a price target of $988/share, up 81% from where it’s now trading.
The Bottom Line
Having been wrong about SHOP stock for so long, I hesitate to recommend either a buy or a sell.
What tipped me toward the “avoid” camp was CEO Tobi Lutke joining the board of Coinbase (NASDAQ:COIN), and integrating Shopify’s software with crypto.
Regardless of the merits, it’s a distraction. Shopify is about making real money for its merchants. Crypto is fake money. Shopify’s endorsement of crypto could easily come back to bite it, if merchants see their cash turning into trash.
What Shopify should be focused on is its advertising problem, and on getting more big accounts. The fall of Meta is leaving a mark that needs to be dealt with. A store without customers is worthless. Until Shopify deals with its customers’ marketing problem, I can’t recommend SHOP stock.
Just remember I’ve been wrong before.
On the date of publication, Dana Blankenhorn held long positions in AMZN, AAPL BABA and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
