3 Things to Know About Shopify Stock After Earnings

Shopify stock has plummeted 78% since its highs, and Shopify now swung to a net loss again, as the economy has softened.

| More on:
A shopper makes purchases from an online store.

Image source: Getty Images

Shopify (TSX:SHOP) is a leading e-commerce platform designed for small- and medium-sized businesses. Shopify’s recent earnings report sent its stock price soaring yesterday, and it provides valuable insight into the company. Here are the three most important points.

Gross merchandise volume (GMV) growth slowing but still above 10%

As per Shopify’s management, the macro environment is placing some stress on Shopify’s business. In fact, businesses are dealing with rising interest rates and inflation. Also, consumers are dealing with the same. This is showing up in trends such as a consumer preference for discount retailers as well as a simple reduction in discretionary spending. It’s playing out as expected and is no cause for alarm in and of itself.

GMV represents the total value of orders facilitated through the Shopify platform. It’s the pulse of Shopify’s business. Last quarter, GMV increased 11%, This is by no means the growth rates that Shopify saw in prior years, but two things are noteworthy here. Firstly, the comparisons are based on a much higher base, that is, $25 billion this quarter versus $20.5 billion a year ago. So, naturally, growth rates diminish over time if only for this simple fact. But it’s okay because it means the business is growing, as we want it to.

Secondly, while the 11% growth rate pales in comparison to last year’s 35% growth rate, it’s still growing at double digits. The pandemic years were artificially high due to lockdowns. In fact, the company always said that those elevated growth rates were a temporary thing. The e-commerce trend was accelerated by years because of the pandemic. Shopify would not be a company with $4.6 billion in annual sales today without it.

Shopify stock is vulnerable to additional risks

One thing that really stood out to me is Shopify Capital, which launched in Australia during the quarter and is now available in four countries. While funding its small business owners is really a great extension for a company like Shopify, I wonder if the risks are fully accounted for.

By its own admission, it’s loaning money to businesses that traditional banks are pretty skittish to lend money to. This brings a lot of additional risk into the Shopify equation. Even at the best of times, small businesses are a risky proposition. Today, they’re even more so. Because clearly, the macroeconomic environment is deteriorating. Rising interest rates and inflation are eating away at businesses. Surely, one can imagine that the risk of default is high and rising.

So, while I like the idea of Shopify helping out its merchants with capital, it also makes me nervous. It can support a merchant, which would ultimately translate into revenues for Shopify, but things can also go wrong. In the third quarter, merchants received $507.6 million in cash advances and loans from Shopify Capital, which has grown to $4.3 billion in cumulative capital funded.

The losses continue, putting SHOP stock at risk

One of the problems that remains with Shopify is that the losses keep mounting. 2022 has seen the return of operating and net losses after the profitable pandemic years. But time keeps marching on, and margins are getting hit. For example, the gross margin was 50% versus 55% last year. Also, the company has swung to a large operating loss as research and development expenses as well as selling, marketing, and administrative expenses are skyrocketing.

In a situation like this, the next logical step is to evaluate the balance sheet. Shopify currently has $6.9 billion of cash and cash equivalents on its balance sheet. That’s a lot. But let’s dig a little deeper. Last quarter, Shopify’s operating cash flow was a negative $200 million. At that rate, Shopify’s cash would last a long time — roughly eight years.

So, the situation is not dire right now, but consider this: a weakening consumer could wreak havoc on Shopify’s earnings and Shopify stock, both in lower merchant revenue and in defaults on Shopify’s loans. The company still has a lot of investment ahead, and this, combined with a weakened consumer, spells trouble. Lastly, Shopify’s stock price remains expensive, trading at a price-to-sales ratio of almost eight times.

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 Karen Thomas has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

More on Tech Stocks

growing plant shoots on stacked coins
Tech Stocks

Get Rich Slowly: 1 Smart Stock to Leave in a TFSA for Years and Years

The TFSA isn’t only for short-term goals. With a little time, here’s how you can use stocks to get rich.

Read more »

financial freedom sign
Tech Stocks

2 TSX Stocks for a Legit Shot at $1 Million in 20 Years

Are you looking for two TSX stocks that could get you $1 million in 20 years? Here are my two…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

Shopify Stock Surges Past 52-Week Highs: Is it Still a Buy Today?

Shopify (TSX:SHOP) stock reported yet another record-setting Black Friday-Cyber Monday weekend. But does that mean it's still a buy?

Read more »

tsx today
Tech Stocks

TSX Today: What to Watch for in Stocks on Tuesday, November 28

Canadian bank earnings and the U.S. consumer confidence data could give further direction to TSX stocks today.

Read more »

A worker uses the cloud for paperless work. tech
Tech Stocks

Alibaba Just Became a Dividend Stock… Could This TSX Stock be Next?

Alibaba Group Holding (NYSE:BABA) recently became a dividend stock. Could Kinaxis Inc (TSX:KXS) be next?

Read more »

Business success with growing, rising charts and businessman in background
Energy Stocks

Rising From the Ashes: Canadian Stocks Bouncing Back Stronger

These two growth stocks have surged back after crashing and burning, and it doesn't look like they'll be slowing down…

Read more »

Growth from coins
Tech Stocks

3 Top TSX Growth Stocks to Buy for December

High-growth TSX stocks such as Lightspeed should help you generate market-beating returns over time.

Read more »

Shopping and e-commerce
Tech Stocks

TFSA Investors: Shopify Is a Top Stock That Could Soar in a Bull Market Rally

Shopify (TSX:SHOP) appears to be getting back on the right track, with shares starting to heat up again.

Read more »