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2022 was a difficult year for Shopify (SHOP -3.06%) investors. Slowing growth and ballooning losses convinced Wall Street to step away from the stock, mainly on fears that a recession will make things worse in 2023.
Those worries either could be wrong or underestimate the challenges ahead for the e-commerce platform. With those opposing possibilities in mind, let’s look at whether the stock is a good buy for investors today.
Shopify’s last earnings report was a mixed bag for shareholders. The good news is that the platform continues to attract more merchants and buyers. Sales were up 22% year over year in the Q3 period that ended in late September; over the past three years, they’ve risen at a compound annual growth rate of 52%.
There were several signs of weakness though. Shopify’s growth rate has slowed considerably since the earlier days of the pandemic. The latest 22% increase seems tiny, compared to the over-90% spike that investors saw in 2021.
And Shopify is losing money. Operating losses landed at a whopping 25% of sales in Q3, and investors can expect further losses ahead as the company continues working toward getting its costs in line with the slower growth profile.
Yet there are good reasons to like the stock right now. Shopify maintains a strong position in the e-commerce industry, which is likely to see many more years of growth ahead, following the current post-pandemic hangover. The platform handled nearly $50 billion of merchandise volume in Q3, and merchants are increasingly opting for complementary services like payments processing and integrated point-of-sale hardware.
And the losses should end soon. Shopify has been slashing costs for several quarters, ever since management realized that the pandemic-related demand surge wouldn’t remain permanent. Gross profit still looks strong at over 50% of sales.
The main reason to avoid the stock is due to concerns that Shopify’s current operating trajectory won’t improve or will worsen over the next few years. A recession could further dampen demand for e-commerce transactions, potentially pushing the company’s return to profitability out into 2024 or beyond.
It seems more likely, however, that Shopify will make steady progress around market-share growth and improving margins. A stronger economy would help in 2023, but the platform can also grow in the type of sluggish selling conditions that characterized late 2022. There will always be demand for services that make selling easier online, and Shopify’s growing pool of merchants is proof of that concept.
SHOP PS Ratio data by YCharts.
While the risks around the business increased, the stock has been discounted accordingly. You can buy Shopify stock for around 9 times annual sales, compared to over 60 at its valuation peak in 2021.
Sure, the next few quarters might be rocky on the earnings front, especially if a recession develops. But investors who buy the stock during this period of pessimism on Wall Street will likely be glad they did when they look back in a few years.
More cautious investors might want to wait for concrete signs that Shopify is done posting significant net losses. But you’ll have to pay a higher valuation for that clarity. Growth-stock investors can look past the current volatility as they patiently hold Shopify shares over the long term.
Demitri Kalogeropoulos has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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