Why Shopify Fell 1.83% Monday

Shopify (TSX:SHOP) crashed 1.83% Monday. Here’s why.

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On Monday, Shopify (TSX:SHOP) stock took a dip, declining 1.83% from the start of trading Monday to Tuesday’s open. There was no major news about the company on the day this momentum was observed. Potentially, it was related to momentum in the U.S. markets: the NASDAQ-100 index fell 2.36% on Monday in a move that mirrored Shopify’s own. Although Shopify is a Canadian company, it does the lion’s share of its revenue in the U.S. market, so it makes sense for the stock to be correlated with U.S. tech.

Tech earnings rolling in

Apart from the correlation with U.S. tech stocks, one factor that might be causing apprehension about Shopify is the company’s upcoming earnings release. On May 2, Shopify will be releasing its earnings for 2024’s fiscal first quarter, a period that encompassed January 1 to March 31. There has been some concern that tech companies will underwhelm when they release their earnings for this period. The big tech giants mostly delivered high growth throughout 2023, but now they have to “beat” earnings results set in that very good period. So, it might not be easy for them to wow investors when they release earnings.

In Shopify’s case, investors have been concerned about revenue deceleration (a decrease in the revenue growth rate) for some time already. The company’s growth peaked in 2021 when revenue nearly doubled. In the most recent quarter, growth fell to 24%. Although 24% growth might sound like a healthy figure, Shopify was priced for more growth than that before it started crashing in 2022. Today, it is no longer as expensive as it was at the 2021 peak, but it still trades at 13 times sales. If growth slows down further, then the stock might react negatively when its upcoming earnings release is published.

Competition heating up in e-commerce

Another possible issue for Shopify is the fact that competition is heating up in e-commerce, the sub-sector of the tech industry that SHOP operates in. The big story in e-commerce over the last two years has been the rise of Chinese platforms. Apps like Temu and Shein directly provide people with Chinese products of the type that locals used to buy and then sell at a markup on Shopify. It’s not clear exactly how much this is affecting Shopify itself, but it is known that Amazon has lost 2.6 million customers since Temu entered the U.S. market. Investors might be thinking about this when they decide whether to buy or sell Shopify stock.

The good news

Despite all of the above, there are many good things happening at Shopify today.

The company recently delivered two consecutive quarters of positive free cash flow, an all-cash measure of profitability.

It boasts many celebrity and “big brand” vendors, who pay fees that may grow significantly even if SHOP never signs up another vendor again.

Finally, Shopify recently started offering generative artificial intelligence (AI) to its vendors. With Shopify’s copywriting assistant, vendors can create compelling product descriptions in seconds. All they have to do is enter some basic facts about their product, and SHOP’s AI will turn that into compelling marketing copy. This has the power to save customers countless hours of labour, so it could encourage people to host their stores on Shopify.

Still, Shopify stock is quite expensive at a time when competition is getting fierce. There are real risks here.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.

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