Despite the recent publication of excellent quarterly results, Shopify (NYSE:STORE) the stock has been falling for a few months. Of course, this is surprising because Shopify was one of the big winners during the novel coronavirus pandemic and is now one of the biggest e-commerce companies in the world. However, the main concern now seems to be slowing growth.
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As mentioned earlier, Shopify‘s sales and net income have grown exponentially during the pandemic; And in hindsight, that really should come as no surprise. Online e-commerce has become the natural alternative to traditional retail avenues when people feared to venture outside their doors. In turn, the more people bought online, the more it helped Shopify’s sales. By the end of fiscal 2020, Shopify had earned over $2.9 billion in revenue, an 86% year-over-year (YOY) increase.
Additionally, 2021 has been a great example of how fast the company is growing. Most recently, Shopify’s fourth quarter revenue for fiscal 2021 was $1.38 billion, a 41% increase over the prior year period. And for the full year, the company said revenue hit $4.6 billion, a year-on-year jump of 57%.
Meanwhile, the advice given by the company was quite bearish, which is why investors took shelter. Specifically, Shopify said it expects “year-over-year revenue growth to be lower in the first quarter of 2022 and higher in the fourth quarter of 2022.”
Despite the stock’s loss of momentum, shares of SHOP are still trading at a forward price-to-earnings (P/E) ratio of 285.71. So, although SHOP stock is a risky business with a muted outlook, it still has high valuations. That said, let’s take a closer look.
SHOP Stock slows as pandemic recedes
At its core, Shopify is an e-commerce platform that allows businesses to build an online marketplace. It provides lots of features and tools including adding payment gateways, carriers, creative options, and more.
Initially, Shopify was launched as an online snowboard retailer, but has since expanded its product line to include apparel, jewelry, electronics, and more. And due to the recent secular shift to digital shopping, the business has grown rapidly, and that rise has only been amplified thanks to the pandemic. However, as the world returns to normal, we see e-commerce stocks giving gains.
Of course, there are also wider issues to blame. No one could have predicted the Russian invasion of Ukraine or the sale of technology earlier this year. In addition, the Federal Reserve seeks to calm inflation by raising interest rates. In fact, we’ve already had the first of these seven hikes. In turn, these factors weigh on growth stocks – and SHOP stocks are no different.
Therefore, you can’t blame management for Shopify’s recent poor stock performance. The company reported bright numbers in its latest quarterly report. For example, Shopify’s global sales reached $6.3 billion for the Black Friday to Cyber Monday period, up from $5.1 billion in 2020. Global sales were up 57% from last year. last year, a solid figure.
However, the major issue seems to be the future of the company. As I mentioned before, management did not provide any numbers, but acknowledged that revenue growth would be highest in the fourth quarter of the year and slowest in the first. Shopify is also aggressively investing in business operations, which will also weigh on its bottom line.
Nevertheless, Shopify continues to invest in its platform. Areas of focus include improving the Shopify app and expanding its product delivery network. So, Shopify is already ready to spend a lot of money. And that’s set to increase significantly in the coming years, with $1 billion in capital spending already planned for 2023 and 2024 to build its US distribution network.
What is the future of Shopify?
Collectively, it can be easy to forget that Shopify continues to grow. Specifically, it’s not a mature company at this point. Therefore, the company will have to continue to invest in its future. And that’s why it invests in infrastructure and leverages partnerships for future growth.
For example, Shopify announced that it has partnered with JD.com (NASDAQ:J.D.) on their Marketplace platform for third-party sellers. The move gives Shopify access to one of the largest e-commerce consumer bases in the world. Specifically, JD said it had nearly 570 million active customers last quarter, up 21% year-over-year. By contrast, Shopify has over 2 million active users and growing.
In addition to working with JD, Shopify also has partnerships with some of the biggest companies in the world, including Google’s parent company. Alphabet (NASDAQ:GOOGNASDAQ:GOOGL), Meta (NASDAQ:Facebook) and walmart (NYSE:WMT).
Is SHOP Stock a purchase?
Overall, Shopify is a popular e-commerce stock among investors. Its solid and light partnerships ensure stability and capacity for growth. It also built a strong brand as quickly – if not faster than – Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), which have been around for much longer.
However, the company is currently going through a difficult period. Growth is slowing and the company must invest aggressively in its operations to maintain revenue. And despite SHOP shares losing momentum over the past few months, they are still trading at very high multiples.
Therefore, this is a stock that investors should wait for, but keep watching in the future.
At the date of publication, Faizan Farooque did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and many other financial sites. Faizan has several years of experience in stock market analysis and was a former data reporter at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions about their portfolio.
