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E-commerce stocks of all shapes and sizes have been taken to the woodshed in 2022. Even some of the most stable businesses in this space around the world have gotten hammered year to date. For example:
Shopify (SHOP -4.17%) continues this trend, falling 74% in 2022. The industry as a whole has struggled due to an uncertain global economy. With inflation high around the world, consumers have pulled back spending on “nice to have” goods and are instead focusing their money on necessities and consumer staples.
With 2022 quickly moving into the rearview mirror, is Shopify poised for a rebound in 2023? Let’s find out.
Image source: Getty Images.
Shares of Shopify have plunged for a few reasons. Despite being one of the largest platforms for small- and medium-sized businesses to build and grow their e-commerce operations, Shopify has seen top-line expansion fall off a cliff. In Q3 2022, revenue rose just 22% year over year to $1.4 billion.
While this might seem like robust growth during a time when nearly all kinds of businesses — not just e-commerce stocks — are struggling, it is still a stark decline from the company’s past expansion rates. Since the company came public in 2015, it has never seen quarterly revenue rise less than 30% on a year-over-year basis — that is, until 2022.
The other potential culprit for shares falling is the company’s unprofitability. In a high-flying market environment like 2020, profitability was no concern. Now, however, investors are pressuring businesses to maintain profitability and punishing those that stay unprofitable. Considering Shopify has operating losses of $619 million over the past 12 months, many investors have kicked Shopify to the curb.
Its investments in the Shopify Fulfillment Network (SFN) aren’t helping with investor sentiment, either. The company wants the SFN to be the logistics platform for Shopify merchants, helping them deliver goods to consumers quickly and reliably.
Of course, building this out is expensive. The company plans to spend $1 billion in cash to build out its SFN over five years, and it also spent over $2 billion earlier this year acquiring Deliverr — $1.7 billion of which was in cash.
However, this is a blessing in disguise, as the SFN will likely provide many benefits to millions of Shopify merchants. The primary struggle for small businesses is that it’s nearly impossible to compete with Amazon’s two-day shipping. In a world where consumers demand delivery in record times, small businesses can lose a lot of sales if it takes them a week to deliver goods.
The SFN is aiding this challenge. While still in the early stages, over two-thirds of domestic packages were shipped within two business days thanks to the SFN in September, and that’s forecasted to reach 75% by year’s end.
The high spending rate to scale this SFN concerns some investors, but long-term investors should see this as a bright light in the company’s future.
Another reason to get excited about Shopify is that its activity could be pivoting. The company had a record Black Friday and Cyber Monday, with merchants seeing $7.5 billion in sales during the weekend. What’s even more impressive is that this was a 19% increase versus an incredible comparable 2021 period. This high growth from an already exceptional time could signal that Shopify might be seeing the light at the end of the tunnel.
Of course, 2023 is still uncertain. In a survey by Bloomberg, economists anticipate a 70% chance of the U.S. entering a recession in the new year. This is just speculation, but a recession in 2023 could result in continued avoidance of discretionary purchases and a focus on keeping a tight budget by consumers. Considering Shopify merchants mainly sell discretionary goods, a sustained downturn in the U.S. economy could result in stifled demand in the coming year.
Yes, the company could struggle in 2023 if the economy slides, but the next five years for Shopify look appealing. With the rise of the SFN, Shopify can enable small businesses to rival Amazon’s quick delivery times, resulting in more sales for Shopify merchants and thus, higher revenue growth for Shopify and adoption of its platform.
The company is at the whims of the macroeconomy in 2023, but if shares don’t fully rebound next year, there’s a good chance they could over the following few years. Therefore, investors might want to scoop up shares while they are near their lowest valuation since 2016.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jamie Louko has positions in Amazon.com, Sea Limited, and Shopify. The Motley Fool has positions in and recommends Amazon.com, Coupang, Sea Limited, and 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.
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