Shopify (NYSE: SHOP) (TSE: SHOP) stock has lost a significant amount of value in the recent past. For context, Shopify stock is down about 60% from its 52-week high.
It’s worth noting that the pandemic provided a significant boost to Shopify’s business and, in turn, its stock price. However, the reopening of retail locations, tough year-over-year comparisons, and normalization in growth led investors to dump Shopify stock.
However, after losing a significant portion of its value, Shopify stock rebounded and is up about 36% in the last seven trading days. While there was no company-specific news, the significant compression in its valuation could have triggered buying.
Now What?
While Shopify stock has rebounded, the expected slowdown in growth remains a drag. Shopify projects its 2022 revenue growth to be lower than 2021 levels (Notably, Shopify delivered 57% growth in 2021).
While Shopify’s growth is expected to moderate, it plans to ramp up investments in its commerce infrastructure and global expansion. While this is expected to support its long-term growth, it will likely take a toll on its near-term margins.
Expecting pressure on margins, Roth Capital analyst Darren Aftahi downgraded Shopify stock to Hold from Buy. Aftahi stated that management plans to limit growth decelerations through international expansion and “recalibrated investment.” However, he expects these measures to have a “material impact on profitability.”
Like Aftahi, Jefferies analyst Samad Samana also expects Shopify’s profit margins to take a hit from business investments. However, Samana is bullish about Shopify’s prospects and sees these investments to support the company’s long-term goals.
Samana expects Shopify’s “merchant solutions GMV (gross merchandise volume) take rate will expand a few bps (basis points) per year, sustaining healthy Merchant Solutions revenue growth even if GMV growth slows.”
The Bottom Line
Shopify’s growth is expected to normalize amid economic reopening. Further, its investments could pressure margins. However, Shopify expects its growth initiatives to gain momentum as the year progresses and would support sales. Meanwhile, international expansion will likely drive its merchant base and its financials.
However, given the macro headwinds and slowdown in growth, Wall Street is cautiously optimistic about SHOP stock. It has received 13 Buy and 14 Hold recommendations for a Moderate Buy consensus rating. The average Shopify price target of $988.63 implies 40.8% upside potential from current levels.
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