Why Shopify Stock Crashed Over 18% Wednesday

Here’s why I believe today’s massive selloff in SHOP stock is overdone.

Jitendra Parashar

Author Bio Jitendra Parashar is a financial journalist who has been writing for The Motley Fool Canada since June 2020. With more than 13 years of experience in financial journalism, equity research, and market analysis, he helps investors understand market developments and identify long-term investment opportunities. Before joining The Motley Fool Canada, Jitendra spent several years at Market Realist covering U.S. equities, major economic developments, and developments in the automotive and technology industries. He also worked in commodity and currency research at brokerage firms, gaining insight into how economic trends, central bank decisions, and geopolitical events influence financial markets. Jitendra writes for beginner investors, dividend seekers, and Canadians looking to build wealth over the long term. He also contributes to the daily TSX Today series, explaining key Canadian market developments and highlighting news investors should watch. Based in India, Jitendra follows Canadian and U.S. markets closely. Outside of work, he enjoys travelling in the Himalayas, street and nature photography, and exploring programming and artificial intelligence. Education MBA in Finance and International Business Bachelor's degree in Journalism Areas of Expertise Canadian and U.S. financial markets, long-term equity investing, dividend investing, macroeconomic and geopolitical trends, automotive stocks, emerging technologies, and artificial intelligence. Social Media Profiles LinkedIn Muck Rack Favorite Investment Quote “Simplicity is the master key to financial success.” — John C. Bogle

Published February 16, 2022 2:00 pm EST

online shopping — Image source: Getty Images

What happened?

The shares of Shopify (TSX: SHOP)(NYSE:SHOP) crashed by more than 18% on Wednesday after the company announced its fourth-quarter results. SHOP stock, which was already among the worst-performing TSX Composite components until yesterday, is now trading at $926 per share with more than 47% year-to-date losses compared to a nearly 1% gain in the market benchmark.

So what?

Earlier this morning, Shopify revealed that its December quarter total revenue stood at US$1.38 billion, showcasing about a 41% increase on a year-over-year basis. While its adjusted earnings for the quarter fell by about 14% from a year ago to US$1.36 per share, it still managed to beat analysts’ consensus estimates for its Q4 earnings. Moreover, all of Shopify’s key financial and operational metrics reflected the continuation of a strong growth trend, as I talked about in my Shopify’s detailed earnings review article earlier today.

Despite its better-than-expected Q4 financial results, Shopify’s 2022 outlook seemingly failed to impress investors. In the ongoing year, the Canadian e-commerce firm expects its year-over-year revenue-growth rate to be lower than 2021’s 57%. To justify this slowdown in its revenue growth, Shopify highlighted that it expects “the COVID-triggered acceleration of ecommerce” to subside this year. That’s why its 2022 outlook could be the main reason why SHOP stock crashed by over 18% today.

Now what?

I expected Shopify to beat analysts’ Q4 earnings estimates due to a consistent demand for e-commerce services amid the prolonged pandemic. And to be honest, it also makes sense to me that the company expects its revenue YoY growth rate to decline in the post-pandemic world. No one can expect COVID-related factors to benefit Shopify’s business forever. That’s why this announcement didn’t come as a big surprise for me.

Overall, We shouldn’t forget that Shopify is speeding up its efforts to expand its business in the global market this year, which would help it significantly increase its market reach and minimize its overall risk profile. Given all these factors, I believe today’s massive selloff in SHOP stock is overdone. That said, you may still want to wait for its huge volatility to settle before buying it — especially if you have a low-risk appetite.