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.
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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.
