Shopify (TSX:SHOP)(NYSE:SHOP) investors have seen a massive dip in stock prices year-to-date. In fact, SHOP stock is down 82% from all-time highs and is among the worst performers on the TSX.
Investors were wary about Shopify’s sky-high multiples, resulting in a sell-off. A weak macro environment and deceleration in top-line growth coupled with contracting profit margins accelerated the sell-off in 2022.
Let’s see if Shopify can stage a comeback and recoup a portion of shareholder wealth in the last quarter of 2022.
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A look at Shopify’s gains and losses
Shopify increased sales by 86% year-over-year to US$2.92 billion in 2020. Its top line surged by another 60% to US$4.61 billion in 2021. However, revenue grew by just 21% in Q1 and 15% in Q2, year-over-year.
The pandemic served as a massive tailwind for Shopify in the last two years. As economies reopened, online shopping trends experienced a slowdown resulting in tepid growth for the company.
Slowing sales also led to a decline in operating profits for Shopify. Its adjusted operating income fell from US$237 million in Q2 of 2021 to an operating loss of US$42 million in Q2 of 2022.
Shopify’s sales and marketing expenses were up 62%, while research and development costs rose by a massive 81% in the June quarter. Shopify is clearly sacrificing growth for profitability as the company aims to expand its ecosystem and widen its merchant base.
The company is also building out the Shopify Fulfillment Network to optimize supply chains for merchants and is allocating significant resources to this endeavor.
In the first half of 2022, its net losses stood at a massive US$2.7 billion, compared to a net income of US$2.14 billion in the year-ago period. But a majority of its losses can be attributed to equity investments that are unrealized. In the year-ago period, Shopify’s other income surged by US$2 billion. All in all, on a free cash flow basis, Shopify lost US$206 million in Q2.
Shopify has exposure to companies such as Affirm Holdings and Global-E Online, and these investments were worth US$801 million in Q2, compared to US$3.21 billion at the end of 2021.
Is SHOP stock undervalued?
Analysts expect Shopify to increase its sales by 23.8% to US$7.5 billion in 2022 and by 23.3% to US$9.25 billion in 2023. Comparatively, its bottom line is forecast to swing to a net loss of US$0.16 per share in 2022, compared to net earnings of US$0.84 per share in 2021. Right now, SHOP stock is valued at almost seven times forward sales which is still expensive.
But there are several tailwinds that should drive Shopify shares higher in the upcoming decade. The global shift towards online commerce will continue to gain speed, increasing Shopify’s total addressable market. Further, in Q2 of 2022, Shopify’s gross merchandise volume surged by 11% to US$47 billion, indicating a compound annual growth rate (CAGR) of over 50% in the last three years.
Additionally, Shopify’s POS hardware and integrated payments solutions are available in 13 countries and there is significant room for further international expansion.
Despite the recent challenges experienced by SHOP, analysts remain bullish on this stock and expect prices to almost triple in the next 12 months.
