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Why Shopify Inc. (TSX:SHOP) Stock Is Plunging

Shopify Inc. (TSX:SHOP)(NYSE:SHOP) reported its 2018 second-quarter results on Tuesday.

While the results were better than expected, slowing growth drove shares down as much as 10% in premarket trading.

Let’s analyze the results more in depth to see if this fall in price is justified.

Growth in overall sales on the e-commerce platform is slowing

Shopify earned a revenue of US$245 million in the second quarter of 2018, up 62% from US$151.7 million in last year’s second quarter. That represents a slow down from 68% the quarter before, and from 75% in the second quarter of 2017. But revenue beat the average analysts’ estimate of US$234.6 million, according to Thomson Reuters.

Shopify has seen its year-over-year revenue growth decline steadily over the last six quarters.

Growth slowed for the third consecutive quarter in gross merchandising volume (GMV), a key metric that measures the total amount of sales made by all vendors through Shopify’s platform. GMV grew by 56% to US$9.1 billion in the second quarter, down from the 74% increase the measure saw the year before. GMV is also significantly lower than the 64% the company reported in the first quarter of this year.

Analysts and investors are concerned about what’s driving Shopify’s expansion and how much of its revenue is being generated from larger merchants rather than smaller and riskier ones.

Shopify came under attack last year by short seller Andrew Left of Citron Research, who thought the company relied too heavily on small merchants whose future business is uncertain, and asked it to release more data on customer churn rate – the rate at which customers leave.

On a conference call with analysts Tuesday, CEO Tobias Lutke said that he regretted not building a functionality within Shopify to let merchants open multiple stores with one account to let them play around, make mistakes and grow. According to Lutke, this missing functionality disproportionately affects Shopify’s churn rate, and is something the company is actively looking at making possible.

Shopify has been spending heavily to attract new merchants, which drove a 54.6% jump in subscription revenue in the second quarter.

Shopify Plus, its higher-margin product designed for enterprises, contributed 23% to the company’s monthly recurring revenue, compared with 18% a year earlier.

However, the investments increased operating expenses by 63.2% to US$167.7 million.

The Ottawa-based company net loss widened to US$24 million, or US$0.23 per share, in the quarter ended June 30, from US$14 million, or U$0.15 per share, a year earlier.

Shopify reported an adjusted net income of US$2.5 million, or US$0.02 per share, compared with a loss of US$1.1 million, or US$0.01 per share,  in the second quarter of 2017. The estimate was for a loss of US$0.03 per share.

For the third quarter, Shopify expects revenue of US$255 million, slightly above analyst estimates of US$253 million. Full-year revenue is expected to be between US$1.02 billion to US$1.03 billion, in line with estimates. Earnings per share are expected to reach $0.18 for the year.

Bottom line

I think the market overreacted to Shopify’s slowing growth, the bar was too high. This company is still a good long-term investment.

Shopify isn’t growing the way it used to, but there is still plenty of growth opportunities left for the e-commerce platform. Shopify’s revenue and earnings are expected to grow about 40% and 240%, respectively, to reach over $1.4 billion and US$0.61 per share in 2019. Last month, Aurora Cannabis signed a deal with Shopify to sell pot online, which should further increase revenue.

Shares are still a little expensive, but the 18% drop in price since last week represents an opportunity to buy Shopify on the dip.

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Fool contributor Stephanie Bedard-Chateauneuf owns shares of AURORA CANNABIS INC. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada. 

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