Why Shopify Stock Dropped 3% Yesterday

Shopify’s (TSX:SHOP)(NYSE:SHOP) earnings report was fantastic, but comments around growth took this stock lower yesterday.

| More on:
Modern skyscrapers in business district

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

On Wednesday, Shopify Inc. (TSX:SHOP)(NYSE:SHOP) reported earnings. Its stock fell as much as 7% in early trading before recovering near the end of the day.

Today I’m going to discuss why this stock dropped so sharply, and why this earnings report matters for investors.

Earnings growth expected to slow in 2021

The biggest takeaway from Shopify’s earnings report were comments made by the company that indicated growth in 2021 would not be as good as what was seen in 2020.

That might be expected. After all, 2020 was an absolutely incredible year. “The year of the pandemic” provided accelerated e-commerce growth not many analysts had initially predicted. On the outset of the coronavirus pandemic, expectations were that SME bankruptcies might provide a headwind for Shopify. However, the e-commerce platform provider reported revenue growth of 86% year over year.

The reasons for this slower growth rate this year?

First, Shopify expects a rapid vaccine rollout to result in a return to bricks-and-mortar shopping. Many shopaholics are eager to get back into the mall, preferably without having to wear a mask. If we see a return to normal (or even semi-normal), it’s conceivable e-commerce shopping will take a hit.

Second, the company announced it may not be as aggressive with entering new markets as expected. Shopify’s management team indicated that it may not be “the right time to go really deep” into countries it has on its radar. Rather, expansions to new markets may happen further down the road.

So how were the numbers?

Shopify reported fourth quarter adjusted earnings of US$1.58 per share, handily beating expectations of US.$1.21 per share. The company’s fourth quarter revenue came in just shy of $1 billion, almost doubling last year’s fourth quarter. Additionally, gross merchandize value (the volume of goods flowing through Shopify’s e-commerce platform) doubled last year’s total to more than US$41 billion.

These numbers were excellent. Shopify beat earnings expectations, yet again. One would think a positive earnings surprise would be in the cards. However, the aforementioned comments with respect to forward-looking growth have dampened investors’ outlook.

Bottom line

Shopify is a world-class company absolutely dominating its sector. This company’s growth thus far has far exceeded what many investors thought was possible a few years ago.

However, the bar is continuously raised each and every earnings beat. Investors continue to expect a year-over-year doubling of revenue from this company. Whether or not that’s sustainable for any extended period remains to be seen. These comments have suggested the company’s management team is skeptical of such an idea.

There was likely some profit-taking yesterday, which is understandable. Given how high expectations were coming into this earnings report, any sort of inkling of reduced growth was prone to induce a sell-off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Tech Stocks

TIMER SAYING TIME FOR ACTION
Tech Stocks

Got $300? 2 Simple TSX Stocks to Buy Right Now

Investing whatever little sum you have saved up as soon as possible is one of the best ways to keep…

Read more »

A worker uses a laptop inside a restaurant.
Tech Stocks

2 U.S. Stocks Canadian Investors Can Buy and Hold Forever

Blue-chip companies such as Microsoft and Coca-Cola are forever stocks that have the potential to beat the market in 2022…

Read more »

financial freedom sign
Tech Stocks

1 U.S. Stock to Buy in August That Could Make You a Millionaire

Are you looking for stocks outside the TSX to add to your portfolio? Buy this one company that trades in…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Tech Stocks

2 Beaten-Down Growth Stocks You’ll Be Happy You Own in 2032

Buying these oversold TSX stocks could make you rich by 2032.

Read more »

shopping online, e-commerce
Tech Stocks

Shopify Stock: Could it Reach $100 in 2022?

Shopify stock (TSX:SHOP)(NYSE:SHOP) has seen a huge uptick in daily trading volume, with shares up 28% in the last month.

Read more »

money cash dividends
Tech Stocks

Got $1,000? Buy These 4 TSX Stocks in Bulk!

These four TSX stocks are rebounding already, and offer a substantial opportunity for long-term Motley Fool investors.

Read more »

A stock price graph showing growth over time
Tech Stocks

3 Cheap Growth Stocks to Buy Right Now

Given their growth prospects and cheaper valuations, these three TSX stocks could deliver superior returns in the long run.

Read more »

Overhead shot of young adults using technology at a table
Tech Stocks

3 Stocks I’m Buying During a Tech Stock Correction

Tech stocks like Constellation Software (TSX:CSU) should be on your radar.

Read more »