Wait for Shopify to Bottom Out Before Investing in It

Stock Market

Growth stocks such as Shopify (NYSE:SHOP) have cratered over the past few months. SHOP stock trades roughly 64% lower than its 52-week high price. Though the pain is unlikely to last forever, Shopify and other growth stocks will continue feeling the heat this year.

Shopify (SHOP) logo on a smartphone which is next to a miniature shopping cart and miniature cardboard boxes

Source: Burdun Iliya / Shutterstock.com

Shopify’s business soared during the pandemic where the demand for online shopping reached its peak. Multiple businesses signed up on the platform to become online retailers and jump in on the action. Consequently, the past couple of years were the best in its history. It nearly tripled its sales and doubled its gross merchandise value (GMV) in the past couple of years.

The same can’t be said, though, for 2022. With reopening headwinds in play, e-commerce suddenly didn’t look so great. Such a development didn’t sit well with Wall Street and the stock market, which led to more price erosion. Though Shopify’s long-term outlook remains intact, its near-term troubles cannot be ignored. It’s best to hold the stock as a significant rebound seems improbable.

Post-Pandemic Slowdown

Shopify’s recent results point to a slowdown in its top and bottom lines. Its fourth-quarter revenues beat consensus estimates by $38 million while falling short of consensus estimates by $22 million in the previous quarter. This is paltry compared to Q2 and Q1 beats of $69 million and $126 million respectively.

Similarly, its sales growth is decelerating with every passing quarter. Its sales results came in 41% higher from the prior-year period in its fourth quarter. Though impressive, these results pale compared to the dumbfounding numbers it posted during the height of the pandemic.

Shopify’s management talked about how revenue growth will still outpace the e-commerce sector during its fourth-quarter results. However, they admitted that results wouldn’t nearly be as lofty as last year’s incredible numbers.

Another pertinent element to discuss is the company’s profitability position. It generated a net loss of $371.4 million in the fourth quarter, compared to a net income of $123.9 million during the same period last year. Merchant Solutions is a relatively low-margin business for the company, and it formed a greater proportion of revenues in the quarter. Its gross margin also declined slightly along with other key profitability metrics.

With a slowdown in sales, it will be imperative for the management to efficiently manage company resources and marginalize expenses as much as possible in the upcoming quarters.

Can SHOP Stock Rebound?

Shopify was a pandemic darling, seeing its results skyrocket over the past couple of years. The market is selling off such stocks with a blatant disregard for their long-term ability. Growth is likely to normalize for the company, but it will continue its expansion at a healthy pace. Growth over the coming years will continue to be in double-digits.

Additionally, its adjacent services, such as Capital and Loans, will drive the next era of expansion for the company. Both divisions are seeing tremendous growth in the past few quarters. Hence, investors shouldn’t be too worried about the company’s fourth-quarter results. Its growth rates remain exceptional, and with operating leverage, the company can effectively bring down its costs over time.

Bottom Line on SHOP Stock

Shopify has had it rough of late in the stock market, but its spectacular growth runway cannot be denied. The recent slowdown is likely to continue for the rest of the year, though, weighing in on its stock price.

Expect a harsher time ahead for SHOP. However, the temporary hiccups shouldn’t take away from its impeccable business. It still has plenty of growth catalysts in motion, which will continue to expand its top-line. It’s best, though, to wait for a better entry point before placing your bets on SHOP stock at this time

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

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