Shopify crashed after earnings – Is the stock a buy? | The Motley Fool

Shopify crashed after earnings – Is the stock a buy? | The Motley Fool

Shopify crashed after earnings - Is the stock a buy?  |  The Motley Fool

Shopify (STORE -8.07%) bulls have had a tough year. Early in the pandemic, the Canadian e-commerce company wowed Wall Street with phenomenal sales growth and GAAP profitability, but the narrative has changed. Since publishing its Q1 earnings report, Shopify has seen its price drop 21%, and the stock is now down 77% from its peak.

Does this sale make Shopify a buy? Let’s dive in and see if we can answer this question.

Simplify trade

Shopify’s mission is to make commerce better for everyone. Its software helps merchants market and manage their business across physical and digital channels. This includes branded websites, online marketplaces like Amazon, and social media platforms like ByteDance’s TikTok. Shopify also provides a growing number of value-added services such as payment processing, cross-border trade tools, and financing, as well as thousands of integrations through the App Store.

An investor looks puzzled while erasing something from a piece of paper.

Image source: Getty Images.

With its breadth and ease of use, Shopify outperforms all other e-commerce software providers in terms of market presence and user satisfaction, according to the latest G2 Grid report. This resulted in market share gains. In 2021, Shopify generated 10.3% of e-commerce sales in the United States, second only to Amazon, compared to 5.9% in 2019.

Growth slowdown

In the first quarter of 2022, Shopify’s revenue grew just 22% to $1.2 billion, a significant deceleration from the 110% growth of the previous year. Additionally, gross margin contracted 350 basis points to 53%, and the company generated negative cash from operations of $54 million. But difficult macroeconomic conditions weighed heavily on the entire trading industry. Amazon actually saw its online store revenue drop 3% year-over-year in the first quarter and posted its first quarterly loss since 2015. But Shopify continued to grow and gain market share online and offline in the United States.

Best of all, Shopify’s financial performance still looks impressive over a longer time horizon.

Metric

Q1 2019

Q1 2022

CAGR

Turnover (TTM)

$1.2 billion

$4.8 billion

59%

Free Cash Flow (FTF)

($6.1 million)

$253.7 million

N / A

Data source: YCharts. TTM = 12 consecutive months. CAGR = compound annual growth rate.

Growing market opportunity

Management currently pegs its addressable market at $160 billion, but that figure is expected to rise as e-commerce continues to grow in popularity. To capitalize on this, Shopify is executing a robust growth strategy. He recently added JD.com as a sales channel, allowing merchants to list products on one of the largest e-commerce sites in China, which itself is the largest e-commerce marketplace in the world.

In addition, Shopify has launched its accelerated payment solution (Shop Pay) for all merchants on Alphabetis Google and Metaplatforms‘Facebook and Instagram. This extends its ability to monetize commerce beyond the borders of its platform. Shop Pay also powers the Shop mobile app, a tool designed to drive consumer engagement through personalized product suggestions.

Finally, Shopify closed a record number of Shopify Plus deals in March 2022, which means it’s gaining traction with the biggest sellers. Shopify Plus is its premium e-commerce software, and it already powers brands like all the birds and Figsbut as more large companies join, it could drive growth by increasing gross payment volume (i.e. Shopify takes a cut in payments).

However, Shopify’s most ambitious growth initiative is the Shopify Fulfillment Network (SFN).

Democratize achievement

Thanks to Amazon’s efforts, many consumers now expect two-day or even next-day delivery when shopping online. But this puts small businesses at a disadvantage as they usually lack the resources to offer this option at checkout. Shopify aims to level the playing field with DFS.

In 2019, it acquired robotics specialist 6 River Systems, a company created by former Kiva Systems (now Amazon Robotics) executives. The move enhanced Shopify’s portfolio with collaborative mobile robots — autonomous machines that speed up warehouse operations by helping employees pick and sort products more efficiently.

Last week, Shopify announced its $2.1 billion acquisition of Deliverr, a company that already offers logistics and fulfillment services to merchants on platforms like Amazon, walmartand Etsy. The move will bring artificial intelligence (AI) software to DFS for demand forecasting and inventory management. Even better, it will give Shopify access to Deliverr’s network of warehouses, carriers, and last-mile partners, meaning Shopify merchants will be able to offer next-day or next-day delivery across the United States.

Here’s the big picture: In the short term, DFS will undoubtedly put pressure on Shopify’s margins, which could mean volatility for shareholders. But in the long run, DFS could significantly boost Shopify’s competitive advantage by democratizing fulfillment services and helping individual businesses compete more directly with retail titans like Amazon.

A person takes inventory in a warehouse.

Image source: Getty Images.

Is Shopify a purchase?

Shopify is a leader in e-commerce, an industry that will continue to grow for many years to come. Even better, the founder-led management team is executing an ambitious growth strategy that could further differentiate the company. And with the stock trading at 10x sales — its cheapest valuation in five years — I think Shopify is a crying buy.

That doesn’t mean the stock won’t fall further. But a decade from now, I think this growth stock will be worth a lot more than it is today.

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