Shopify (TSX:SHOP)(NYSE:SHOP) is a legend among TSX tech stocks. It famously returned 5,000% from its IPO date to its peak price in 2021, making many investors wealthy. However, the stock’s glory days seem to be coming to an end. Since the start of the year, SHOP has fallen 70%, and it may have further downward to go from here. SHOP’s most recent selloff came after its first-quarter earnings release, which showed significant revenue deceleration and a $1.5 billion net loss. It may be a while yet before this stock sees a bottom.
There is no doubt that Shopify, as a company, has a lot of potential. It has many major brands using its platform. It has celebrities using it to sell to merch to their fans. It historically had very high revenue growth, and even achieved profits in 2020. However, the company is facing challenges this year. The current economic environment is tough for e-commerce companies, as many consumers are preferring to travel rather than buy goods.
In this article, I’ll explore some factors influencing Shopify’s future trajectory, so we can gauge where it will be in five years.
Revenue-growth slowdown
The biggest challenge Shopify faces this year is a slowdown in revenue growth. In its most recent quarter, it grew sales at 22% and subscription revenue at just 8% — both all-time lows. The 22% sales growth might sound high, but remember this stock used to grow revenue at between 50% and 100%, and was priced based on those numbers. Because of its historically high growth, SHOP used to trade at 60 times sales. Its current growth just doesn’t support such a valuation.
e-commerce industry trends
Another challenge facing Shopify this year is industry trends. Specifically, a slowdown in e-commerce growth. Forecasters still believe that e-commerce will grow at 14% CAGR over the long term, but that certainly isn’t happening this year. In 2022, most of the major e-commerce companies are seeing their growth slow down, including
- Amazon;
- Alibaba;
- eBay;
- And others.
2020 and 2021 were huge growth years for e-commerce. Thanks to the COVID-19 lockdowns, the industry made way more sales than anybody expected. During the early months of the pandemic, retail businesses were shut down, and e-commerce firms brought in extra revenue due to the surge in online shopping. However, it appears that all of this online shopping merely pulled future growth forward. Online sales did not increase in 2020 due to an economic boom, they increased because people shifted shopping from in store to online. That kind of effect doesn’t typically continue long term, so it looks like online shopping will have to slow down from the 2020/2021 base period.
Foolish takeaway
Shopify stock is down this year, but it isn’t out. The company still has a huge merchant base and a solid competitive position. If it can resume its growth, then its stock can start to rise. However, it may take some time before SHOP starts really moving. The macro environment in 2022 isn’t favourable to it.
