Why are shares of Shopify crashing?

Posted: 17 February 2022 8:00 am
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The e-commerce company’s stock started sliding after warning of slower revenue growth in 2022 amid absence of last year’s “COVID-triggered acceleration.” Here’s why it could be a buy now.

Share in e-commerce giant Shopify (SHOP) plummeted 19% during yesterday's trading even though December's quarterly earnings surpassed analysts expectations. But is the volatility creating an opportunity for long-term investors.

Why Shopify stock is falling?

Shopify reported fourth-quarter and full year 2021 earnings Wednesday morning before the bell but slower revenue guidance for 2022 scared investors.

Shopify posted quarterly revenue of $US1.38 billion, up 41% year over year and beating estimates of $US1.34 billion.

The company reported earnings of $US1.36 per share, down from the year-ago quarter earnings of $US1.58 per share but topping estimates of $US1.21.

Driving these solid results were record-setting merchant-solutions revenue, which was up 47% year over year to $US1.03 billion.

This revenue is generated primarily from payment processing fees from Shopify Payments.

It was the first time the company’s merchant-solutions revenue exceeded $1 billion in a single quarter. At the same time, subscription solutions revenue climbed 26% to $US351.2 million, as Shopify saw more merchants joining the platform.

Despite Shopify’s successful fourth quarter results, Wall Street was largely unimpressed by the company’s forward guidance, causing the stock to plunge to a level not seen for almost two years.

Shopify gave a weaker outlook for growth in 2022, as online spending readjusts to a post-pandemic environment that has consumers facing higher inflation.

“... the COVID-triggered acceleration of ecommerce that spilled into the first half of 2021 in the form of lockdowns and government stimulus will be absent from 2022,” the company said in a statement on Wednesday. “There is caution around inflation and consumer spend near term, for the full year.”

As a result, Shopify said it expects full year 2022 revenue growth to be lower than the 57% increase in 2021.

Heading into Wednesday’s earnings report, Shopify’s stock had already retreated 35% in 2022. The stock is down 59% from its November 2021 high of $US1,762.92.

Thinking of buying Shopify stock?

Though the e-commerce giant expects the pandemic boom to wane in 2022, causing slower revenue growth compared to last year, Shopify still expects rapid revenue growth that outpaces the overall e-commerce industry.

This growth will likely be most apparent in the last quarter of the year, Shopify says, as new contract terms with apps and theme developers will likely cause a “headwind” to its subscription revenue in the first half.

With shares now down 59% from its high last year, Shopify stock could be worth a closer look for long-term investors who see the value in the growing e-commerce space. Retail e-commerce revenue is expected to grow 73% over the next four years, exceeding $US1.3 trillion dollars by 2026. Shopify currently has the largest ecommerce platform market share in the USA, according to data from Statista, with 29% of online businesses using it to power their stores.

In addition, Shopify had nearly $7.8 billion in cash at the end of 2021, and it plans “aggressive” sales and marketing investments, as well as $200 million in capital spending in 2022.

A solid 18 of 29 analysts covering Shopify shares have called it a Strong Buy or Buy, versus just 10 Holds, one Underperform and no Sells of any kind. The consensus price target stands at $2,094.05. With Wednesday’s drop, this represents a mouth-watering 187.45% increase.

For more on the e-commerce sector, here’s our guide to 15 key stocks.

At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.

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