Why Shopify Stock Dived 8% in December

Shopify (TSX:SHOP)(NYSE:SHOP) stock rose by only about 24% in 2021 after posting much stronger 178% gains in 2020.

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What happened?

The shares of Shopify (TSX:SHOP)(NYSE:SHOP) fell by more than 8% in December 2021 after posting consistent gains in the previous couple of months. As of December 30, SHOP stock was trading at $1,781.51 per share with about 24% year-to-date gains against slightly over 22% advances in the main TSX index.

So what?

Shopify has been one of the best-performing tech stocks on the TSX since its listing on the exchange more than five years ago. Its outstanding returns of about 2,962% in the last five years have made it even more popular among long-term investors who want to invest in high-growth stocks.

SHOP stock saw a roller-coaster ride in December. While there was no company-specific major news during the month, tech sector-wide volatility could be responsible for this roller-coaster ride in the Canadian e-commerce giant’s shares. Concerns about inflationary pressures and speculations on the U.S. Fed’s latest move have kept tech stocks largely directionless lately.

On December 16, Evercore ISI Research upgraded SHOP stock from “in line” to “outperform.” This upgrade didn’t seem to have any major impact on its stock price movement, though.

Now what?

In 2020, the COVID-19-related restrictions gave a big boost to e-commerce trends, helping Shopify grow at a much faster rate than ever. This was one of the key reasons why its 2020 total revenue rose by 85.6% to US$2.9 billion. As a result of this strong demand, its adjusted earnings jumped to US$3.98 per share in 2020 from just US$0.30 per share in the previous year.

Many analysts predicted Shopify’s overall financial growth would see a major slowdown after 2020 once the global pandemic-related restrictions started easing. But its overall business growth remained very strong in the first half of 2021, with its earnings continuing to more than double in Q1 and Q2. However, the financial growth reflected signs of a slowdown, as expected, in the third quarter. With this, the company missed analysts’ earnings expectations by nearly 26%.

It’s important to note that Shopify continues to report strong double-digit sales growth in 2021, despite the recent slowdown. And its quarterly earnings are still much stronger than the pre-pandemic levels. In the September quarter, it reported a 46% year-over-year rise in its revenue to US$1.1 billion with the help of a 51% jump in its merchant solutions revenue.

SHOP stock yielded more than 170% positive returns each in 2019 and 2020. However, its slowing financial growth trend along with a tech sector-wide correction has limited its stock gains to just around 24% this year.

Given the immense growth potential of the e-commerce industry, I still find Shopify stock attractive. The demand for its commerce services is likely to increase further in the coming years, which could help companies like Shopify maintain strong earnings growth trends. These positive expectations could be the reason why most Street analysts still recommend a “buy” on its stock with a target price of nearly $2,084 per share.

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.

The Motley Fool owns and recommends Shopify. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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