Technology stocks were the talk of the town in 2020, the first COVID year. The TSX wouldn’t have finished in positive territory if not for the strength of its vaunted technology sector. Its acknowledged leader, Shopify (TSX: SHOP)(NYSE:SHOP), rewarded investors with a smashing return of 178.41% for the year.
The global commerce platform ranked number one in TMX Group’s TSX30 List in 2020. Shopify also placed second in 2019 and 2021 in the flagship program for growth stocks. However, technology (-20.03%) is the worst-performing sector year to date.
While Shopify advanced 2.39% to start Q2 2022, it has fallen significantly since rising to $2,139.82 on November 19, 2021. As of April 1, 2022, the share price is $865.71 — a year-to-date loss of 50.29%. Because of the steep price drop, it appears that Shopify is good value now, if not a bargain deal. The low-price target of market analysts in 12 months is $1,645.96, or a minimum return potential of 90.13%.
Free fall
Shopify’s free fall begun on February 16, 2022, when it posted its biggest drop (-17.1%) ever. Management gave a business growth guidance for this year, citing a reset to online spending resets and return of consumers to traditional brick-and-mortar stores. It also mentioned the impact of higher inflation
The $109 billion company’s statement after reporting the full-year 2021 results reads, “COVID-triggered acceleration of e-commerce that spilled into the first half of 2021 in the form of lockdowns and government stimulus will be absent from 2022. There is caution around inflation and consumer spend near term, for the full year.”
Many entrepreneurs, merchants, and small businesses saw their sales climb by as much as 86% during the early stages of COVID-19. While it beat consensus EPS estimates in three of the last four quarters, growth is suspect in the coming quarters. Shopify is no longer TSX’s most valuable company. Royal Bank of Canada has reclaimed the throne already.
Staying power in doubt
There are reports that contracts with multiple fulfillment partners and warehouses were terminated. For Colin Sebastian, an analyst at Baird, Shopify has reached a fork in the road. It makes more sense now to grow its own distribution warehouses and not rely on third parties. Some analysts say Shopify might consider in-house inventory management and logistics services, too.
Now, investors question the tech darling’s staying power and recovery under the current environment. Management likewise hinted that new contract terms with apps and theme developers would cause a headwind to revenue from its store subscription plans in the first half of 2022.
Dan Romanoff of Morningstar doesn’t see Shopify growing at an explosive pace forever. He said, “I’m not willing to believe that far down the road that they’re still growing at that rate.”
No near-term gains
Shopify is among the most watched stocks of growth investors in Q2 2022. The premier tech stock is absurdly cheap, although recovery is hard to predict or ascertain, given the market uncertainties, including rising interest rates.
Mark Mahaney, senior managing director and head of internet research at Evercore ISI, said interest rate risk is a big headwind for tech stocks. He said about Shopify, “Don’t expect to make money in the next three months, but you could be making really good returns in the next three years.”
