Volatile Shopify Deserves Another Look

In mid-March, I analyzed Shopify (NYSE:SHOP) stock in the midst of a horrendous down streak.

Let Shopify Stock Finish Cooling off Before You Invest

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Shopify had fallen more than 35% in roughly a month. It was down more than 60% for the year and analysts were diving for cover. I suggested that it was possible for SHOP stock to bounce back, but the recovery would take plenty of time:

“It’s certainly possible that Shopify will return to its growth path at some point. But the massive expenditures ahead – combined with Amazon’s (NASDAQ:AMZN) 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.”

So, as you can imagine, I wasn’t expecting anything interesting to happen with SHOP stock. Boy, was I wrong.

What’s Happening With Shopify?

Since I wrote those words, Shopify has been on fire. The stock began a rapid ascent on Mar. 14, rising from $550 to $780 in a matter of days. That is an increase of around 42%. And even though the stock pulled back a little this week, SHOP stock is still showing gains of 37% since my last analysis.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.

But what is interesting is that there has been no serious company news over the last week or so that triggered the move higher. Perhaps investors are finally realizing that SHOP stock was undervalued.

Cathie Wood’s Ark Fintech Innovation ETF (NYSEARCA:ARKK) made another big investment in SHOP to the tune of 32,350 shares, but that alone didn’t encourage investors. Shopify has long been one of ARKK’s top holdings and Wood has a track record of buying depressed tech stocks at a bargain, so ARKK’s purchase wasn’t a surprise.

Instead, e-commerce stocks seem to being overly rewarded – and punished, depending on the day – by investor sentiment from Russia’s invasion on Ukraine. And Shopify is seeing the biggest swings.

For example, on Monday, SHOP stock fell more than 12%. Other e-commerce stocks followed suit, but with much smaller losses:

  • Etsy (NASDAQ:ETSY) lost 4.9%
  • Wayfair (NYSE:W) lost 5.9%
  • MercadoLibre (NASDAQ:MELI) lost 4.5%
  • Overstock.com (NASDAQ:OSTK) lost 4.9%

So, it appears that Shopify will have, at least for the short-term, a period of outsized volatility. If you’re an investor, you should tread carefully. And if you hold options, be particularly careful.

Looking Ahead

Shopify posted fourth-quarter revenue of $1.38 billion, which was a 41% increase from a year ago. Adjusted gross profit came in at $700.6 million, which was a gain from $510.6 million from the fourth quarter of 2020.

Earnings were a net loss of $172.8 million, or $1.36 per share, down significantly from the fourth quarter of 2020 of $198.8 million, or $1.58 per share.

In 2021, Shopify doubled marketing expenses to more than $275 million, and research and development costs nearly doubled to almost $274 million.

Shopify has already said it would increase spending on its fulfillment network in 2022. It also plans to spend $1 billion in capital expenditures in 2023 and 2024.

Those kind of expenditures are prompting Roth Capital analyst Darren Aftahi to downgrade his rating on SHOP stock from buy to hold. He says the company’s spending on international expansion will have a “material impact on profitability.”

The Bottom Line on SHOP Stock

SHOP stock is more volatile than anyone could have expected. But I’m standing by my initial assessment.

E-commerce is an amazing and exciting growth opportunity for investors. Online retail sales are expected to hit $6.17 trillion by next year and will comprise 22% of all total retail sales.

But the market is incredibly competitive and Shopify is committed to investing deeply in the international market. For the long-term, profits may be hard to come by. But it is certainly possible for SHOP stock to return to highs of more than $1,700 last seen in November.

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.


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