on July 29 Shopify (a store 0.54%) The shares began trading on a 10-for-1 split — bringing the company’s stock price down 90% (to about $35 per share) while keeping the $47 billion market capitalization intact. While this change doesn’t affect Shopify’s valuation in terms of revenue and profits, it does make stocks more accessible to smaller investors who don’t have a lot of money to put in the market.
However, is it time to bet on Shopify?
What is Shopify?
Shopify is a global e-commerce platform that allows small business owners to build and customize online stores that can sell through multiple media, including online, in-person, and mortar. Unlike competitors like Amazon or ebaywhich primarily operates third-party marketplaces, Shopify focuses on the business side of the equation – making it a unique and well-characterized way to bet on the industry.
Like most technology-related businesses, Shopify has faced significant macroeconomic challenges in 2022. With an inflation rate of 8.6%, the US Federal Reserve is expected to continue shrinking its balance sheet and raising interest rates to cool the economy. These moves increase the cost of capital for companies while making investors less willing to buy expensive stocks with future expectations embedded in their valuations.
Shopify shares are down a staggering 74% so far – at least in part because of these headwinds. But the company also faces some company-specific challenges that should not be overlooked.
victim of her success
First-quarter revenue grew 22% year over year to $1.2 billion, a massive slowdown from the prior-year quarter, when sales jumped 110% from the same period last year. Management also expects revenue to be “lower” in the first half of 2022 but has not given any exact numbers. While slowing growth is the last thing investors want to see in a growth stock like Shopify, the trend needs to be seen in the appropriate context.
The pandemic years of 2020 and 2021 saw an unprecedented boom in online shopping, giving companies like Shopify a tough one in the near term. But the company’s long-term thesis as a way to bet on independent e-commerce companies remains. The management is also working on new growth drivers to keep the ball going.
In May, Shopify completed its $2.1 billion acquisition of freight logistics company Deliverr. This deal will help it create an end-to-end logistics platform, which will better enable merchants (which are usually small businesses) to compete with giants through features such as two-day and next-day delivery. The company’s focus on creating a strong economic moat will help it continue to expand in the post-pandemic world.
Should you buy Shopify?
Bear markets are a great time to shop for quality businesses at a discount. And with a strong economic moat, along with healthy growth prospects, Shopify is definitely a company to watch. The recent stock split may make it more psychologically appealing to small investors.
However, with a price-to-earnings (P/E) multiple of around 600, the stock isn’t as cheap as it looks now. And with the Fed expected to continue raising rates, modest profitable growth stocks like Shopify are likely to remain under pressure in the near term. Investors may want to wait until some of these issues are resolved before taking on a position with the company.