Shopify is an e-commerce platform that helps merchants to sell their products and offers tools that enable them in growing and managing their businesses. Shopify (NYSE: SHOP) (TSE: SHOP) shares are down 76.5% year-to-date amid the broader market sell-off. Investors seem concerned about Shopify’s slowing growth rates and profitability, as well as its ability to navigate tough market conditions in the days ahead.
High growth stocks have fallen out of favor this year with investors seeking value stocks amid soaring interest rates and the fear of an economic downturn. E-commerce stocks like Shopify, which gained much prominence in the early days of the pandemic, are deep in the red, and could continue to be under pressure in case of a recession.
Shopify’s Financials Under Pressure
Shopify delivered phenomenal growth earlier in the pandemic, thanks to accelerated adoption of e-commerce trends due to stay-at-home mandates and multiple stimulus payments. However, growth rates have decelerated with the fading of pandemic tailwinds.
Shopify’s revenue grew 22% to $1.2 billion in Q1 2022. This compares to the 110% growth seen in Q1 2021, the highest revenue growth since the company went public. Further, the company reported a huge loss in Q1 2022 on a GAAP basis, while its adjusted EPS fell significantly to $0.20 from $2.01.
Concerns about Shopify’s profitability are growing due to soaring inflation, supply chain pressures, and significant investments made by the company to ensure multi-year growth. To strengthen its fulfillment solutions, the company recently acquired Deliverr, an e-commerce fulfillment startup, for $2.1 billion. This acquisition will help Shopify offer merchants end-to-end supply chain solutions.
The company’s efforts to enhance its platform and offer additional tools will help it in attracting more merchants. During the first-quarter conference call, management disclosed that it is experiencing increased adoption of merchant solutions, like Shopify Payments, Shopify Capital, and Shopify Markets. However, the near-term impact of growth investments on profitability, especially during an economic downturn, is a matter of concern.
Wall Street’s Take
Last week, Evercore ISI analyst Mark Mahaney slashed his price target for Shopify stock to $560 from $660, but maintained a Buy rating. Mahaney significantly lowered estimates across the board in his Internet large cap coverage to reflect high-cost inflation pressures, severe foreign exchange headwinds, growing signs of softening consumer demand, and recession fears.
Overall, consensus among analysts is a Moderate Buy based on 12 Buys, 14 Holds, and two Sells. At $73.05, the average Shopify price target implies 126.02% upside potential from current levels.
Conclusion
While some analysts believe that Shopify will continue to gain from the growing strength of e-commerce over the long-term, others remain on the sidelines due to concerns about the impact of macro headwinds and a slowdown in consumer spending.
With the economy at the cusp of a recession, it might be difficult for the stock to recover though a market-beating performance in the upcoming quarters could revive the stock.
