Shopify (TSX:SHOP) is Down by Over 70%: Can it Recover?

The blue-eyed darling of the Canadian tech sector had a stellar performance since going public until 2021 but has since had a heavily underwhelming performance.

| More on:
shopping online, e-commerce

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

The Canadian tech sector has been one of the top-performing segments of the Canadian economy for the last few years. 2018 was one of the worst years for the TSX as the S&P/TSX Composite Index saw an overall 11.6% loss. The decline was attributed to a correction in nine of the 11 primary sectors of the economy.

However, the Canadian tech sector registered an annualized price return of 11.7% that year. The next year the Canadian benchmark index posted a 19.1% gain, with the tech sector leading the charge with a 60.2% gain.

2020 came with a black swan event as the pandemic triggered a massive selloff in stock markets during February and March 2020. However, the TSX quickly recovered in the weeks following the dip. Unsurprisingly, it was the tech sector, led by Shopify Inc. (TSX:SHOP)(NYSE:SHOP), that delivered stellar returns, keeping the benchmark index afloat.

However, the picture is vastly different right now for Shopify stock and the tech sector at large. At writing, the S&P/TSX Capped Information Technology Index is down by 36.2% year-to-date, and Shopify stock is down by 72.8% in the same period.

Is Shopify stock an undervalued stock at current levels that could post a significant recovery? Will it lead the charge for the tech sector’s recovery?

A stellar run and drastic decline

Shopify went public in mid-2015, and its earliest investors saw unimaginable annual returns on their investments until 2021. From 2016–2020, the stock of the e-commerce giant posted a 5-year annual average return of 113% but a relatively meager 21.7% in 2021. Currently trading at a discount of over 80% from its all-time high, Shopify stock has lost its market-beating momentum.

The pandemic brought with it substantial tailwinds for the tech industry. However, growing macroeconomic issues started creating pressure on the entire tech sector. The industry-wide meltdown and management’s outlook of lower revenue growth in 2022 resulted in a significant decline in Shopify’s share price as the world moved into a post-pandemic era.

It was only natural that the growth rate would decline when the tailwinds were no longer there, but investors began losing interest in the stock.

Shopify stock generated US$1.3 billion in net income during its first quarter of fiscal 2021. It reported a net loss of US$1.5 billion in the same period for fiscal 2022. The drastic drop in its financial performance was inevitable, and market analysts do not expect the figures to improve by the next quarterly earnings report.

Foolish takeaway

The company’s financial issues have forced its management to make several organizational changes. From changing its compensation packages to layoffs, the uncertainty has resulted in significant problems in its operations. However, the company’s president, Harley Finkelstein, is adamant that the company will recover and come out stronger on the other side of this slump.

Shopify stock does not have a lot going for it that could make it an attractive investment at current levels. Despite a heavily discounted share price, it trades for a 248.43 trailing price-to-earnings multiple that does not qualify it as an undervalued stock. It is indeed an expensive stock to own right now. While it is unclear when the stock will recover, what is certain is that it will take time for the company to regain investor confidence.

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.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify.

More on Top TSX Stocks

grow money, wealth build
Top TSX Stocks

Got $2,000? Here Are 3 Smart TSX Stocks to Buy Now

If you've got some cash that you're looking to invest now, here are three smart investment options on the TSX.

Read more »

A solar cell panel generates power in a country mountain landscape.
Top TSX Stocks

3 TSX Stocks You Can Hold for the Next 3 Decades

While the market faces significant headwinds, it's crucial to ensure that you can commit to the TSX stocks you're holding…

Read more »

Top TSX stocks to buy in August 2022
Top TSX Stocks

Top TSX Stocks to Buy in August 2022

Every month, we ask our freelance writer investors to share their best stock ideas with you. Here’s what they said.…

Read more »

A worker uses a double monitor computer screen in an office.
Top TSX Stocks

TD Bank vs Suncor Energy – Which Value Stock is Best?

The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a great dividend stock. Could Suncor Energy (TSX:SU)(NYSE:SU) be even better?

Read more »

A airplane sits on a runway.
Top TSX Stocks

Why Air Canada (TSX:AC) Stock Is Trading Close to Its Yearly Lows

AC stock has lost 26% in 2022. Its strong balance sheet could help it emerge stronger through difficult times.

Read more »

Arrowings ascending on a chalkboard
Top TSX Stocks

2 Growth Stocks to Boost Your Portfolio

Some of the best long-term investments for your portfolio are hard to spot. Here are two growth stocks to boost…

Read more »

crypto, chart, stocks
Top TSX Stocks

TFSA Cash: Turn a $6000 Annual Contribution to $140,000 by 2032

These Canadian stocks have strong growth potential and can multiply your TFSA cash significantly over the next decade.

Read more »

An airplane on a runway
Top TSX Stocks

It’s Time for TFSA Investors to Get Greedy With These 2 Stocks

CAE (TSX:CAE)(NYSE:CAE) and Air Canada (TSX:AC) are great stocks for TFSA investors to consider buying while they're down and out.

Read more »