Shopify's (SHOP 1.42%) stock tumbled 15% on May 5 after it posted its first-quarter report. The Canadian e-commerce service provider's revenue rose 22% year over year to $1.2 billion but missed analysts' estimates by $40 million. Its adjusted net income declined 90% to $25 million, or $0.20 per share, which also missed analysts' expectations by $0.45.
On a generally accepted accounting principles (GAAP) basis, Shopify posted a staggering net loss of $1.5 billion, compared to a net profit of $1.3 billion a year ago. That calculation included $1.6 billion in investment-related losses and $118 million in stock-based compensation expenses.
Image source: Getty Images.
Those numbers were ugly, but Shopify has already surrendered more than two years of gains and sits about 75% below its all-time high. Is it time to take the contrarian view and accumulate some shares of this hated stock?
Shopify's post-lockdown deceleration
Shopify was already generating robust growth in gross merchandise volume (GMV), gross payment volume (GPV), and revenues before the pandemic hit. However, all three growth metrics accelerated in 2020 as the pandemic spread and drove more merchants to open online stores.
Those tailwinds faded in the second half of 2021 as more businesses reopened. Shopify's slowing growth in GMV, GPV, and revenue in the first quarter of 2022 reflects those tough year-over-year comparisons:
|
Growth (YOY) |
2019 |
2020 |
2021 |
Q1 2022 |
|---|---|---|---|---|
|
GMV |
49% |
96% |
47% |
16% |
|
GPV |
55% |
110% |
59% |
27% |
|
Revenue |
47% |
86% |
57% |
22% |
Data source: Shopify. YOY = Year over year.
The company faced difficult comparisons against its 114% GMV growth and 137% GPV growth in the first quarter of 2021, which were both driven by government stimulus checks and lockdown measures. In addition, it said inflationary headwinds exacerbated its year-over-year slowdown by driving consumers away from online stores and toward discount retailers.
Shopify didn't mention Apple's iOS update during its conference call, but that change -- which allows users to opt out of data-tracking ads -- could also be hurting smaller merchants that rely on Meta Platforms' Facebook and Instagram to sell their products.
On the bright side, Shopify Payments continues to grow. It processed 51% of its GMV within that integrated payments system during the first quarter, up from 46% a year ago and 42% in the first quarter of 2020. That ongoing expansion could lock in more merchants and widen its moat against sprawling payment platforms like PayPal Holdings.
NASDAQ: SHOP
Key Data Points
But its expenses are surging
Shopify's near-term slowdown isn't surprising, since many other e-commerce companies face similar challenges. However, its adjusted gross and operating margins both contracted significantly in the first quarter.
|
Period |
2019 |
2020 |
2021 |
Q1 2022 |
|---|---|---|---|---|
|
Adjusted gross margin |
55.7% |
53.5% |
54.4% |
53.7% |
|
Adjusted operating margin |
2.9% |
14.9% |
15.6% |
2.6% |
Data source: Shopify.
Adjusted gross margin fell 280 basis points year over year to 53.7% as Shopify recognized a higher mix of lower-margin revenues from its Merchant Solutions business and Shopify Payments. Its cloud infrastructure investments and revenue-sharing deals with third-party app and theme developers also exacerbated that compression.
Meanwhile, its adjusted operating margin plummeted from 21.3% to 2.6% as it expanded R&D (research and development), data, sales, and marketing teams. Those higher investments weren't surprising since Shopify has been aggressively expanding its own fulfillment network over the past three years.
However, Shopify blindsided investors with its plan to buy Deliverr, a fulfillment technology provider, for $2.1 billion (80% cash and 20% Class A shares) to expand that fulfillment network. Its newly created Class B shares -- which wield 10 votes each and are fully controlled by CEO Tobi Lütke, his family, and closest associates -- won't be spent on that acquisition.
Shopify says the acquisition, which adds 400 employees to its total headcount, will compress both its gross and operating margins this year. In other words, it plans to ramp up its spending as its revenue growth slows down. It also didn't provide any guidance beyond CFO Amy Shapero's vague statements about a "rebalancing" in consumer demand in the second half of the year.
Shopify's stock still isn't cheap
Analysts expect Shopify's revenue to rise 33% this year but for its adjusted earnings to decline 50%. Based on those estimates, Shopify's stock still trades at 185 times forward earnings and seven times this year's sales -- even though it's already given up all of its pandemic-era gains.
However, Shopify's disappointing first-quarter earnings report and surprising purchase of Deliverr -- its largest acquisition ever -- strongly indicate those estimates are still too high. Therefore, I wouldn't be surprised if Shopify loses at least another third of its market value before it bottoms out.
Shopify's business model is still disruptive, but there simply aren't enough reasons to buy this stock in this challenging market. Investors should wait for its business to stabilize and its valuations to cool before buying any shares.
