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Shopify: The Bubble Burst – Still A Solid Buy But After Market Stabilizes

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Investment Thesis

Shopify Inc.’s (NYSE:SHOP) declined further by -41.32% since our last bullish analysis, from $579.51 on 9 May 2022 to $340.04 on 14 April 2022. We believe the stock is again oversold with a three-fold trading volume post-FQ1’22 earnings call, given its projected deceleration in revenue growth. In hindsight, there was no way that any company could have sustained a CAGR of over 50% post reopening cadence, since the COVID-19 pandemic growth was utterly unique in recent modern history. SHOP shared that its YoY revenue growth will be affected, given that “the COVID-triggered acceleration of e-commerce in the first half of 2021 from lockdowns and government stimulus is absent from the first half of 2022.”

As a result, long-term SHOP investors who had buy-in at a more reasonable valuation have nothing to worry about, given that the stock is a long-term hold in the coming decade. However, given the ridiculous market correction, those who had purchased at over $1K during the highs would, of course, be suffering massive losses.

SHOP’s Slowing Growth Is To Be Expected Post Pandemic Cadence

SHOP Revenue and Net Income

S&P Capital IQ

It is evident that SHOP grew in relevance and adoption during the COVID-19 pandemic, given its tremendous revenue growth in the past two years, which brought forward its growth by approximately one year. However, it seems that the company’s aggressive expansion and development have started to bite back, given its deepening net losses in FQ1’22. Nonetheless, its improving operating metrics proved that the global e-commerce market is still expanding rapidly, given that it is expected to grow from $13T in 2021 to $55.6T in 2027, at a CAGR of 27.4%.

In FQ1’21, SHOP reported revenues of $1.2B, representing YoY increases of 21.21%, though it also reported massive net losses of -$1.47B, mainly attributed to its investments. In addition, the company reported a Monthly Recurring Revenue (MMR) of $105.2M and Subscription Solutions revenue of $344.8M in FQ1’22, representing excellent YoY growth of 17% and 8%, respectively, since it is a direct comparison against FQ1’21’s massive growth during the COVID-19 pandemic. In addition, it is apparent that more merchants are using Shopify Plus, its highest tier subscription at a $2K monthly fee, given that it accounted for 30% of its MMR in FQ1’22, as opposed to 26% in FQ1’21.

Furthermore, SHOP reported Gross Merchandise Volume of $43.2B and Gross Payments Volume of $22B in FQ1’22, representing YoY increase of 16% and 27.1%, respectively. This robust growth demonstrates the growing importance of SHOP’s platform for online and offline merchants globally. In addition, the company reported Merchant Solutions revenue of $858.9M in the same quarter, mainly attributed to increased adoption of merchant solutions, including Shopify Payments, Shopify Capital, and Shopify Markets. As a result, we are of the opinion that SHOP still executed brilliantly in FQ1’22.

SHOP R&D, Selling/Marketing, and General/Administrative Expenses

S&P Capital IQ

SHOP’s net losses in FQ1’22 are to be expected, given that the company had warned about its aggressive reinvestment of gross profit dollars into the business, during its FY2021 earnings call and further reiterated in the FQ1’22 call. The chart above shows that the company had aggressively increased most of its operational costs, with R&D and Marketing expenses reporting a 66.6% YoY increase, while almost doubling its Administrative expenses. Moving forward, given the ongoing macro issues, we expect its higher operating expenses to hit SHOP’s stock performance for the next few quarters. Nonetheless, with $2.45B of cash and equivalents on its balance sheet, we are not overly concerned.

In fact, we are glad to see SHOP sacrificing short-term profitability for long-term growth and ambitions, given that it is aiming to match AMZN’s capability in fulfillment capabilities in the next few years. As a result, we should expect to see SHOP continue its excellent performance ahead, given:

  • Its integrated online infrastructure.
  • Omnichannel payment capabilities.
  • Expanded Shopify Fulfillment Network complete with two-day delivery coverage and warehouses with the aid of partner service providers.
  • Massive user base from the COVID-19 rally.

These strategies would enhance its operational efficiencies, expand its margins, improve its profitability and FCF generation, and consequently, improve the market sentiments by FY2024. As a result, investors looking for quick short-term gains should look elsewhere, as SHOP is here for long-term growth.

SHOP Projected Revenue and Net Income

S&P Capital IQ

Over the next three years, SHOP is expected to report revenue growth at a CAGR of 36.42%. Consensus estimates that the company will report revenues of $5.83B and a net income of $0.1B in FY2022, representing a YoY increase of 26.4% and a decline of -96%, respectively. SHOP’s management had guided that FY2022 revenue growth will be lower in the first half and highest in the fourth quarter of 2022. However, it is also clear that macro events are hindering SHOP’s growth, given:

  • A recession caused by rising interest rates and inflation in the next two years could potentially reduce global e-commerce spending.
  • The ongoing Ukraine war, intensifying the effects of global supply chain issues while increasing operational costs.
  • Deceleration of revenue growth compared to the massive growth experienced during the COVID-19 pandemic may spook some investors.
  • Overvaluation during the pandemic led to its stock being oversold today, returning it to beyond pre-pandemic levels.

Despite this, SHOP’s platform is here to stay. The company is also growing in strength through its international expansion, new product development, and extended partner ecosystem. In addition, we expect SHOP’s latest acquisition of Deliverr, a fulfillment technology provider, to add value to its expanding Shopify Fulfillment Network moving forward. As a result, though the recent decline in stock prices and slowing revenue growth may seem alarming, we recommend patience, given its massive potential in the decade.

In the meantime, we encourage you to read our previous article on SHOP:

  • Shopify: Time For Long-Term Growth After The Roller Coaster Ride

This in-depth analysis by Riyado Sofian of SHOP’s business model is also an excellent resource for those interested in deep diving into SHOP’s business model and business opportunities:

So, Is SHOP Stock A Buy, Sell, or Hold?

SHOP 3Y EV/Revenue and P/E Valuations

S&P Capital IQ

SHOP is currently trading at an EV/NTM Revenue of 5.94x and NTM P/E of 487.58x, lower than its 3Y mean of 29.33x and 708.58x, respectively. It is evident that many other tech stocks which flourished during the COVID-19 pandemic, such as Amazon (AMZN) and Netflix (NFLX), are now being corrected post-opening cadence. Despite our bullish stance previously, we are chastened by the enduring market pessimism.

SHOP’s 5Y Stock Price

S&P Capital IQ

Even now, many still believe that SHOP is overvalued, despite the steep decline in the past six months. It is evident from the price action, given that the stock is currently trading at $340.04 on 9 May 2022, down 80% from its 52 weeks high of $1762.92. As a result, we may see a continuous decline in its valuation and stock price as “the post-pandemic reality sets in.” Nonetheless, we believe these temporary headwinds will be alleviated in the next two years, given the ongoing macro events and impending recession.

SHOP remains a solid stock, though in retrospect, probably at a premium valuation given its elevated NTM P/E. Nonetheless, with the projected revenue growth at a CAGR of 36.42%, the company remains a highly relevant e-commerce stock, with a growing Gross Merchandise Volume and Monthly Recurring Revenue post-pandemic. As a result, our recommendation to SHOP investors is to hold on for a challenging ride ahead. For those who have yet to, we encourage patience as the market continues to correct high-growth tech stocks moving forward. You would be able to buy in later at a more sustainable entry point.

Therefore, we rate SHOP stock as a Hold for now.