Shopifyit is (STORE -8.62%) the stock fell 15% on May 5 after the release of its first quarter report. Revenue for the Canadian e-commerce service provider rose 22% year-on-year to $1.2 billion, but missed analysts’ estimates of $40 million. Its adjusted net income fell 90% to $25 million, or $0.20 per share, which also missed analysts’ expectations of $0.45.
Based on generally accepted accounting principles (GAAP), Shopify posted a staggering net loss of $1.5 billion, compared to a net profit of $1.3 billion a year ago. That calculation included $1.6 billion in investment-related losses and $118 million in stock-based compensation expenses.
Image source: Getty Images.
Those numbers were ugly, but Shopify has already shed more than two years of gains and is about 75% below its all-time high. Is it time to take the opposite course and accumulate some shares of this hated stock?
Shopify’s post-lockdown deceleration
Shopify was already generating strong growth in gross merchandise volume (GMV), gross payment volume (GPV), and revenue before the pandemic hit. However, all three growth metrics accelerated in 2020 as the pandemic spread and drove more merchants to open online stores.
These tailwinds faded in the second half of 2021 as more businesses reopened. Shopify’s slower growth in GMV, GPV, and revenue in Q1 2022 reflects these difficult year-over-year comparisons:
Growth (YOY) | 2019 | 2020 | 2021 | Q1 2022 |
|---|---|---|---|---|
GMV | 49% | 96% | 47% | 16% |
GPV | 55% | 110% | 59% | 27% |
Revenue | 47% | 86% | 57% | 22% |
Data source: Shopify. YOY = year after year.
The company faced tough comparisons with its 114% GMV growth and 137% GPV growth in the first quarter of 2021, both of which were driven by government stimulus checks and lockdown measures. Additionally, he said inflationary headwinds exacerbated its year-over-year slowdown by driving consumers away from online stores and toward discount retailers.
Shopify did not mention Appleduring his conference call, but this change – which allows users to opt out of data-tracking ads – could also hurt small merchants who rely on Metaplatforms‘ Facebook and Instagram to sell their products.
On the bright side, Shopify Payments continues to grow. It processed 51% of its GMV within this integrated payment system during the first quarter, compared to 46% a year ago and 42% in the first quarter of 2020. This continued expansion could lock in more merchants and widen its gap. against sprawling payment platforms. to like PayPal Credits.
But his expenses are increasing
Shopify’s short-term slowdown is unsurprising, as many other e-commerce businesses are facing similar challenges. However, its adjusted gross and operating margins both contracted significantly in the first quarter.
Period | 2019 | 2020 | 2021 | Q1 2022 |
|---|---|---|---|---|
Adjusted gross margin | 55.7% | 53.5% | 54.4% | 53.7% |
Adjusted operating margin | 2.9% | 14.9% | 15.6% | 2.6% |
Data source: Shopify.
Adjusted gross margin fell 280 basis points year-over-year to 53.7% as Shopify recognized a higher combination of low-margin revenue from its Merchant Solutions business and Shopify Payments. Its investments in cloud infrastructure and revenue-sharing agreements with third-party app and theme developers have also exacerbated this squeeze.
Meanwhile, its adjusted operating margin fell from 21.3% to 2.6% due to the expansion of R&D; (research and development), data, sales and marketing teams. These higher investments were not surprising since Shopify has been aggressively building its own distribution network over the past three years.
However, Shopify has blindsided investors with its plan to buy Deliverr, a fulfillment technology provider, for $2.1 billion (80% cash and 20% Class-A stock) to expand that network.. Its newly created Class B shares – which each have 10 votes and are fully controlled by CEO Tobi Lütke, his family and his closest associates – will not be spent on this acquisition.
Shopify says the acquisition, which adds 400 employees to its total workforce, will squeeze both its gross and operating margins this year. In other words, he plans to increase his spending as his revenue growth slows. He also offered no guidance beyond CFO Amy Shapero’s vague statements about a “rebalancing” of consumer demand in the second half.
Shopify’s stock still isn’t cheap
Analysts expect Shopify’s revenue to grow by 33% this year, but adjusted earnings are expected to fall by 50%. Based on those estimates, Shopify shares are still trading at 185 times forward earnings and seven times sales this year — even though it has already given up all of its pandemic-era gains.
However, Shopify’s disappointing first-quarter earnings report and surprise purchase of Deliverr—iits biggest acquisition ever—mmake it clear that those estimates are still too high. Therefore, I wouldn’t be surprised if Shopify lost at least another third of its market value before it hit bottom.
Shopify’s business model is still disruptive, but there just aren’t enough reasons to buy this stock in this tough market. Investors should wait for its activity to stabilize and its valuations to cool before buying shares.