While E-commerce has lost some of its luster to newer hype cycles like generative artificial intelligence (AI), it is still one of the most transformational technology megatrends in our lifetime. And Shopify (SHOP 1.24%) offers investors exposure to the small business side of the equation through its storefront creation platform.
Let's dig deeper into what the next five years could have in store for the company.
A business in recovery mode
Like many online-focused companies, Shopify's business and stock price boomed during the COVID-19 pandemic, with the latter hitting an all-time high of $169 in late 2021 (stock split adjusted). At the time, more small businesses were signing up for Shopify's platform to meet surging stay-at-home demand for goods and services. But eventually, a combination of slowing growth, rising interest rates, and inflation made the market sour.
Shopify's growth stalled, and its stock price collapsed throughout 2022. And while the company has begun digging itself out of the hole, it is still down 66% from its all-time high. Weaker-than-expected first-quarter results have done little to improve the situation.
NASDAQ: SHOP
Key Data Points
Shopify's revenue grew by a healthy 23% year over year to $1.9 billion as more small businesses and merchants signed up for its online storefront solutions. But net income fell from $75 million to a loss of $281 million because of a non-cash charge related to the sale of its logistics arm to Flexport in mid-2023. However, the biggest headwind from earnings was probably Shopify's disappointing future guidance.
A lackluster near-term outlook
In the second quarter, management expects Shopify's year-over-year revenue growth rate to decelerate to the high teens while gross margins fall 50 basis points. This modest forecast could be a sign that Shopify's rebound is running out of steam in the near term. But it isn't the end of the world for investors who plan to hold the stock long term.
Management seems to be taking the appropriate steps to set the company up for success over the next five years. The platform continues to attract large clients, such as Coach Outlet, a discount store owned by Fashion holding company Tapestry. And Shopify's push into enterprise-level solutions for big businesses could enhance its growth and provide much-needed diversification away from potentially less stable small businesses. The company is also targeting international expansion.
Image source: Getty Images.
According to Shopify's president, Harley Finkelstein, international business is a "massive area of growth." And the company has developed a platform called Shopify Markets Pro designed to help clients sell internationally as easily as in their domestic markets. This strategy involves Shopify's Israel-based partner, Global E Online, which offers tools for website translation, customs compliance, and international returns.
Should investors buy the dip?
So far, Shopify shares have slid a whopping 25% since the first-quarter earnings announcement on May 8th, with declines still ongoing at the time of writing.
This crash may have something to do with the company's abnormally high valuation. With a price-to-earnings (P/E) multiple of 60, Shopify stock is priced for perfection, so even minor disappointments could lead to seemingly outsized declines in the equity value. For context, the S&P 500 trades for an average P/E of 27, while e-commerce alternative Amazon trades at a relatively reasonable 41 times its forward earnings.
Shopify stock is expensive. And while its respectable growth rate and compelling international expansion could help it beat the market over the next five years, investors may want to wait for an even lower price point before buying the stock.
