What do you do when a stock market darling like Shopify (SHOP) has fallen over 73% year-to-date? Do you view the stock with suspicion, wondering if something has changed with its fundamentals? Do you believe that the stock has overcorrected and it’s a great buying opportunity? Or do you simply wait and watch to see if this once-promising growth stock can dust itself and get back on track?
We believe it’s a mixture of options two and three. It could be a great buying opportunity, but there could also be more pain left in the stock. We are neutral on the stock.
Shopify is a Canadian tech company that offers essential e-commerce infrastructure. It operates in over 175 countries. Basically, it provides businesses (small and large) with tools to start, grow, market, and manage their operations online.
It is the second-largest e-commerce company in the U.S. In 2021, it was responsible for 10.3% of total e-commerce in the U.S. In 2019, the number was 5.9%. The company grew quickly during the pandemic, but its stock saw a sharp correction in 2022. The company’s stock price has fallen over 78% from its November 2021 highs.
Disappointing Q1 Numbers
Shopify released its Q1-2022 numbers on May 5. Analysts had expected an EPS (earnings per share) of $0.87. The actual number was $0.25.
Total revenue for Q1 grew 22% to $1.2 billion, or a two-year CAGR (compounded annual growth rate) of 60%. Monthly recurring revenue was $105.2 million, up 17% from Q1 2021, where it came in at $89.9 million. Subscription revenue was $344.8 million, up 8% year-over-year, as more merchants joined the platform.
For context, in 2021, the company’s revenues had grown 110%. Of course, that year saw everyone and their uncle start up an e-commerce store as people were stuck at home and looked for extra income.
Shopify expects “year-over-year revenue growth to be lower in the first half and highest in the fourth quarter of 2022.” Will investors have the patience to hold on that long to see if Shopify’s guidance rings true? There are too many macroeconomic uncertainties to take that risk now.
The Federal Reserve has increased interest rates, and once markets took some time to digest this fact, they realized it could hurt them in the short term. Stocks fell, but growth stocks fell more.
In an interview with BNN Bloomberg Television, Shopify President Harley Finkelstein appealed to investors to look at the company’s long-term prospects instead of focusing on short-term pain.
He said, “We’re in an inflationary environment, and consumer spending has changed dramatically. We’re looking at very difficult comps here. I think anyone that’s studied the stock and the market sees that. When you compare Q1 of 2022 to Q1 of 2021, we had lockdowns, we had government stimulus, and it was a very different economy.”
Is Deliverr a Smart Play?
Markets also were disappointed by Shopify’s announcement that it would acquire Deliverr, a fulfillment technology provider, for $2.1 billion. The fulfillment space is a low-margin one, and investors don’t seem too pleased that the company has spent billions to enter it. Shopify, of course, thinks this is a very good move. It said that Deliverr will enable it to streamline “logistics to provide simplicity and scale advantages for merchants.”
Deliverr could be a game-changer for Shopify. Online shoppers in the U.S. expect delivery in 1-2 days. While it’s possible for Amazon to fulfill this expectation, smaller sellers are often at a disadvantage. Shopify wants to sort that out with Shopify Fulfillment Network (SFN). Deliverr is a major step in fixing this process.
Tobi Lütke, Shopify’s CEO, said, “Together with Deliverr, Shopify Fulfillment Network will give millions of growing businesses access to a simple, powerful logistics platform that will allow them to make their customers happy over and over again.” How the acquisition impacts the company will be revealed in the next couple of years. Our expectation is that the company will see short-term pressure due to its Deliverr acquisition (around 80% of Deliverr’s operating expenses go to paying its 400 employees). However, if Shopify plays its cards right, Deliverr could boost Shopify services in a big way.
In early 2022, SHOP announced a strategic partnership with JD.com (JD), a Beijing-headquartered company. China is the world’s largest e-commerce market that could be worth $3.3 trillion by 2025, which is more than 5x the U.S. market. Shopify’s partnership will allow merchants to set up shop on China’s biggest e-commerce player.
Wall Street’s Take
Turning to Wall Street, 15 out of 28 analysts have given Shopify shares a Buy rating, while 11 of them have suggested a Hold on its shares. There are two Sell recommendations.
The average Shopify price target is $646.71, which represents a solid 73.4% upside on the stock. However, the lowest forecast on the stock is only $400, which is not much higher than its current price of $373.
Ever since the Federal Reserve increased interest rates, growth stocks, and tech stocks, in particular, have been on the receiving end of a bear hug. If you are or want to be a long-term investor in Shopify, you can choose to enter the stock at current levels. However, if you are like us and believe that there is more pain in the offing, you would do well to hold off any purchases. The stock could still fall some more, making it an even better bargain.
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