Shopify: Investing in Business Growth Has a Price, but Could Pay Well in the Future

Shopify: Investing in Business Growth Has a Price, but Could Pay Well in the Future

Shopify Inc. (NYSE: SHOP ), a leading e-commerce platform, was once a favorite stay-at-home stock and surged during the pandemic lockdowns. The reopening of the economy and a stock rotation to safer value picks from high-growth and high-multiples financial ratios stocks caused SHOP stock to lose about half of its value in the past year. It now has losses of 55.5% year-to-date (YTD). Shopify is an interesting e-commerce stock as it has financial strength and great profitability. What is the reason behind the severe selloff? It is mostly related to higher spending to support the growth of its operations. Shopify Business News: Renewable Energy Initiatives

Shopify powers 100% of its global operations offices with renewable energy and is taking the climate impact challenge one step further . It announced it has signed a “power purchase agreement (PPA) to power 100% of employee home offices across North America with wind energy.”

This initiative to use clean energy sets an example for other companies as climate change is a major global issue.

Shopify also shows a strong social culture through supporting Ukraine and announcing it will not collect any fees from its Ukrainian merchants and partners. As expected, the firm announced its suspension of business operations in Russia and Belarus.

The global growth expansion plans remain a key priority as Shopify and JD.com have announced a deal to target the Chinese market, an e-commerce market that could be worth $3.3 trillion by 2025. Earnings: A Mixed Story

If 2021 was Shopify’s biggest year ever, then why has the stock declined so much in 2022? The fourth-quarter (Q4) 2021 results were mixed with an earnings per share (EPS) GAAP of negative $2.95, a miss by negative $3.26.

A milestone was hit while Merchant Solutions Revenue exceeded $1 billion for the first time. But this was not the only positive news. Total revenue in Q4 was $1.38 billion, a 41% increase year-over-year (YOY). Gross Merchandise Volume (GMV) increased 31% YOY. Monthly Recurring Revenue (MRR) increased 23% YOY and was higher than $100 million for the first time. Additionally, gross profit dollars grew 37%.

There have also been several pieces of bad news and this was the dominant one sending SHOP stock tumbling. Operating income for Q4 2021 was $14.4 million, or 1% of revenue, a severe decline from the income of $112.5 million, or 12% of revenue in Q4 2020. Another big hit is a net loss of $371.3 million, or $2.95 per basic and diluted share.

Why was it a big hit? Shopify has made a remarkable economic turnaround in the past two consecutive years showing net profits. Any return to net losses may be a sign that the best days are over. Any business must not just be profitable to thrive, it must show consistency and reliability. Shopify spooked investors in both of those categories.

The full-year financial highlights showed a 57% increase in revenue to $4.6 billion and a surge of net income to $2.9 billion compared to net income of $319.5 million in 2020.

Shopify stated that in 2022, one of the top priorities is to develop the Shopify Fulfillment Network. This is not a bad idea at all.

The magnitude of capital expenditures, though, for 2022 is $200 million. In 2021, capital expenditures were nearly $51 million . This suggests that free cash flow is a key metric Shopify will face difficulties with in trying to continue its upward trend. And lower free cash flow is also bad news for valuation. SHOP Stock: Still A Rich Stock

SHOP stock is expensive based on its price-to-book (PB) ratio of 7.66x compared to the U.S. Information Technology (IT) industry average of 3.9x. Shopify also has price/earnings to growth (PEG) ratio of 2.94 .

The Q4 results state that “Shopify intends to reinvest back into our business aggressively throughout 2022, deploying all of our gross profit dollars back into the business.” We should expect to hear news of any share buybacks, which will be very positive and supportive news.

Seasonality is another factor investors should be aware of. The e-commerce platform expects a weak Q1 2022 and a strong Q4 2022.

I see SHOP stock remaining expensive, but a prolonged selloff could present an investment opportunity for long-term investors. In theory, the seasonality factor should be reflected somehow in the SHOP stock price. But do not just take this as an isolated factor. Shopify should continue to deliver net profits, especially now that its stock has declined that much. Boosting profitability will result in an attractive forward price-to-earnings (P/E) ratio as the price […]

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