Down 80% This Year, What Will It Take For Shopify Stock To Recover?

SHOP: Shopify logo

Shopify stock (NYSE: SHOP) continues to drift lower, falling by about 10% over the past month, taking its year-to-date decline to about 80%. While a bulk of the decline in the stock came earlier this year, as investors fled growth stocks as the Fed began its monetary tightening, Shopify’s underlying e-commerce business is also taking a hit as people return to physical stores, with high inflation and rising rates also weighing on consumer confidence. Shopify posted a tough set of Q2 2022 results with revenue growth slowing to 16% year-over-year versus the 57% growth the company posted in the year-ago quarter, with the company also swinging to a net loss, versus a profit a year ago.

Now, given the magnitude of the rout in Shopify stock, it’s safe to assume that much of the recovery will hinge on macros. Thus far, the Fed has also not shown signs that it will ease on its rate hikes, with the bank raising rates yet again by 0.75% late last month taking the Federal Funds Rate to over 3%, from just about 0.25% at the start of this year. Moreover, U.S. GDP has also contracted over the last two quarters with consumer sentiment remaining weak. If inflation eventually cools, we could see the Central bank step back on its rate hikes potentially helping consumer-focused growth names such as Shopify.

Another key concern investors have had is that Shopify has focused on building out its own distribution network to take on Amazon. This is likely to be a multi-year endeavor and could cost the company billions of dollars, weighing on profitability and cash flows in the near term.  However, the narrative could change if investors eventually see proof points that the strategy is working. Shopify has considerable scale, with the company’s customer base rising 2x from pre-pandemic levels, with volumes of transactions on its platform almost half as large as Amazon’s marketplace as of last year.  Shopify customers are also quite locked-in given the switching costs involved with moving to another platform. Now, providing more complete fulfillment services is likely a natural extension for the company, helping it to expand its revenue base and ecosystem which includes e-commerce software and analytics tools, payments, and lending.

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Although there remain a lot of questions relating to Shopify at this juncture, a low stock price and certainty don’t usually come together. There is risk involved, but the risk-to-reward trade-off for Shopify looks compelling. At the current price of $27 per share, the stock trades at just about 6x consensus 2022 revenue, down from the lofty 20x to 40x levels seen between 2019 and 2021. It’s not like growth is going to go away, either. The consensus pegs about 23% revenue growth for the company over 2023. This could make the stock attractive to investors in the long term.

We value Shopify stock at about $37 per share, roughly 35% ahead of the current market price.  See Shopify Valuation: Is SHOP Stock Expensive Or Cheap? for more details on Shopify’s valuation and Shopify Revenue for more details on the company’s revenue streams and how they are trending.

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Returns Oct 2022
MTD [1]
YTD [1]
Total [2]
 SHOP Return -1% -81% 528%
 S&P 500 Return 0% -25% 60%
 Trefis Multi-Strategy Portfolio 0% -26% 195%

[1] Month-to-date and year-to-date as of 10/2/2022
[2] Cumulative total returns since the end of 2016

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