Where did Shopify stock crash?

Written by Amy Legate-Wolfe at The Motley Fool Canada

It appears that Online shop (TSX:SHOP) stock couldn’t have been wrong a few years ago. Even last year, Shopify stock was able to search for words as it showed an improvement in earnings. So what happened?

Shopify stock is down 34% from its 52-week high. So what went wrong? Today, we’ll uncover some answers.

All-time highs

Part of Shopify’s stock problem actually has to do with its successful past. During the COVID-19 pandemic, Shopify experienced unprecedented growth as businesses around the world rushed to establish or expand their online presence. Lockdowns and social distancing measures forced consumers to shift to online shopping, which increased demand for e-commerce solutions. As one of the leading e-commerce platforms, Shopify benefited greatly from this shift. The company’s revenue and user base grew rapidly, leading to a significant increase in its stock price.

But that explosive growth wasn’t sustainable. Much of that future growth was effectively “pushed forward” during the pandemic. As the world began to normalize, with brick-and-mortar stores reopening and consumer behavior balancing between online and offline shopping, Shopify’s stock growth began to slow. Investors who had priced in continued high growth began to reassess the stock’s valuation, which led to a decline in its price.

The broader economic environment also played a key role in Shopify’s stock performance. Rising interest rates were a significant factor. Central banks around the world have been raising interest rates to combat inflation. Higher interest rates make it more expensive for companies to borrow money. This can slow their expansion plans and squeeze profit margins. As interest rates rise, fixed-income investments like bonds become more attractive to investors. This shift in investor preferences could lead to a sell-off in growth stocks, which are generally perceived as riskier.

The story continues

Valuation Concerns

Shopify stock has historically traded at high multiples, reflecting market expectations for continued high growth. Even after its recent decline, Shopify trades at about 12 times its price-to-sales multiple, which is still considered high compared to other high-growth tech stocks. This premium valuation means that any slowdown in growth or adverse economic conditions could have a significant impact on the stock price.

Now, Shopify’s recent move from fixed contract rates to variable platform fees has introduced some uncertainty. While many premium merchants have secured favorable three-year contract rates, this change could impact future revenue stability and predictability. This shift requires ongoing investment in customer acquisition to maintain the merchant base, which can be costly and impact profitability.

Improvements needed

Right now, analysts want to see a few areas where improvement can be seen. While Shopify has seen significant revenue growth, analysts would like to see that trend continue at a rapid pace. Sustaining double-digit revenue growth over the next few years is key. This is especially important as the company transitions from pandemic-induced surges to more normalized growth rates.

Additionally, gross merchandise volume (GMV) is a critical indicator of overall sales made through the Shopify platform. Analysts expect GMV to continue to grow, driven by both the addition of new merchants and higher sales volumes from existing merchants. This metric is key because it directly impacts Shopify’s transaction-based revenue streams.

Shopify’s profitability metrics, including gross profit margin and net profit margin, are areas of great interest. Analysts want to see improvements in these margins, reflecting better cost management and operational efficiency. Achieving higher profitability could provide a stronger foundation for sustainable long-term growth.

Next up, we have good old earnings per share (EPS). EPS growth is a key indicator of a company’s profitability per share. Analysts closely monitor this metric, expecting further increases. A strong EPS growth trend can boost investor confidence and support higher stock valuations.

Summary

Overall, while Shopify’s growth potential remains promising, analysts emphasize the importance of these metrics in assessing the company’s long-term profitability and investment appeal. Improvements in these areas could help ease concerns about its current high valuation and support continued investor confidence. As such, it’s worth keeping an eye on this information as it could point to another rally in the stock.

The article Where Did Shopify Stock Go Wrong? first appeared on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has positions at Shopify. The Motley Fool has positions at and recommends Shopify. The Motley Fool has a disclosure policy.

2024