Few growth stocks have been hit as hard by the market sell-off as Shopify (STORE -7.02%).
Shares of the e-commerce software leader have plunged 80% in just six months as a combination of shifting market sentiment, slowing e-commerce growth and falling valuations in the software sector as a service have all destroyed the stock.
Even after that dip, it’s still hard to call Shopify cheap. It trades at a price-to-sell ratio of 7 based on tracking results, and its price-to-earnings ratio is well into the triple digits.
But buying Shopify might turn out to be a smart move down the road. Here are three reasons why you should take advantage of the discount.
1. Stock is below pre-pandemic levels
Anchoring in the stock market (when you use a previous price to put the current price into perspective) can be a bad idea because markets change and a stock doesn’t really care about its previous price. But sometimes grounding makes sense.
For example, in the first two months of 2020, before the pandemic hit, Shopify never traded below $395 per share, and it reached $593.89 on February 12, 2020. In comparison, the stock was below $350 on Friday, May 12. 20.
Shopify shares have fallen from pre-pandemic levels even as revenue tripled in 2020 and 2021. For this to be a rational move, the stock’s outlook must have deteriorated significantly. Although the near-term growth rate has slowed as the company faces tough pandemic comparisons and there has been a ripple effect in e-commerce from COVID, the long-term opportunity in online retail still looks promising.
There is no reason to think that the e-commerce market has suddenly matured.
2. Its growth rate will accelerate
Shopify’s revenue growth fell to 22% in the last quarter, by far the slowest in the publicly traded company’s history, but there’s a good reason for that.
Like other e-commerce companies, Shopify lagged the last quarter before vaccines were made available to the general public and in which consumer spending was boosted by stimulus checks. Almost every e-commerce company reported disappointing first quarter results, and Amazon even reported a drop in first-party sales.
The fact that Shopify was able to overtake its peers in a difficult environment shows that it continues to gain market share, but the difficult comparison also means that its growth should accelerate as the year progresses and the comparisons become easier. With the recent sell-off, investors seem to be overreacting to short-term news.
3. Buy With Prime is not a Shopify killer
One of the reasons for Shopify’s negativity is Amazon’s new Buy With Prime program, which lets shoppers shop with Prime benefits on merchant websites. Previously, Prime was only available on Amazon’s website.
While this seems like a smart way for Amazon to tap into Shopify’s user base, if the program is successful, it may not be so easy for Amazon to expand to meet demand, as the company has already been stretched once during the pandemic with delivery times becoming slower than normal. And it’s not easy for a company the size of Amazon to expand capacity.
CEO Tobi Lütke was asked about Buy With Prime during Shopify’s recent earnings call, and his response was eye-opening. Lütke sees it more as a complementary service than a competitor since it should expand the e-commerce market and attract new online sellers, which is ultimately good for Shopify. As he put it, “Whatever is good for traders is – it will cause more entrepreneurship, which is exactly – helps a company’s vision.”
2022 is expected to be a tough year for Shopify, especially as rising interest rates are expected to chill the economy. But in its guidance, management expects revenue growth to accelerate, with the fourth quarter being the strongest. A year from now, Shopify’s story will likely be much better than it is today, and chances are the stock price will reflect that.
The stock is down mainly on short-term concerns. This is the perfect time to take advantage of the sale.