Is Shopify Undervalued?

So-called “pandemic stocks” saw astonishing growth in the second half of 2020 and the first half of 2021. After the entire market bottomed out on March 23, 2020, major indexes hit all-time highs in the months that followed. These gains were driven in large part by the companies that were in the right place at the right time to provide support through COVID-related quarantines, closures, and stay-at-home orders. 

Some of the businesses that benefited from COVID mitigation measures included Amazon, the go-to solution for online shopping, and Zoom, the winner among video conferencing applications. Companies that provide work-from-home and learn-from-home infrastructure, including Apple, Google (Alphabet), and Microsoft, saw tremendous gains. 

Digital entertainment providers – particularly Netflix – drew new subscribers in by the thousands, and social media – Facebook, in particular – had impressive increases in advertising revenue. Some of the key pandemic stock gains looked like this: 

• Amazon – 76 percent (2020), 2 percent (2021) 
• Apple – 81 percent (2020), 34 percent (2021) 
• Facebook (Meta) – 33 percent (2020), 23 percent (2021) 
• Google (Alphabet) – 31 percent (2020), 65 percent (2021)
• Microsoft – 41 percent (2020), 51 percent (2021)

Shopify doesn’t usually come up when pandemic stocks are discussed, but this all-in-one e-commerce platform grew rapidly during the pandemic.

Both 2020 and 2021 were strong years for Shopify in terms of revenue and stock price, however shares have lost roughly 50 percent of their value to date in 2022. Why did Shopify stock drop? Is Shopify undervalued at today’s price? Most importantly, will Shopify stock recover? 

How Shopify Got Started 

In 2006, Shopify founders Tobias Lütke and Scott Lake had an idea for a small business. They wanted to sell snowboards and related equipment online. However, their entrepreneurial plans were thwarted at every turn by the complexity of accepting digital payments.

Though it is hard to believe, given the variety of options available today, there simply wasn’t an easy way for individuals and small businesses to send and receive payments online in 2006. 

The inadequacy of digital payment solutions and merchant services for the little guy prompted Lütke and Lake to reconsider their business plan. Instead of giving up, they decided to go after a much larger goal: to democratize e-commerce and reduce barriers to business ownership for everyone.

In 2017, the company expanded to include brick-and-mortar stores by making point-of-sale transactions possible so that merchants could begin accepting payments in-person as well as online. 

Today, Shopify makes it simple for anyone to accept digital payments, but that’s just the beginning. The company now offers wraparound support, with services for setting up an online business, marketing products, and managing the customer journey from start to finish.

It operates across 175 nations, supports 1.75 million merchants, and brings in tremendous revenue through subscription plans that range from $29 per month to $2,000 per month. 

Shopify Q4 2021 and Full Year Financial Results

Shopify announced its fourth-quarter and full–year 2021 financial results on February 16, 2022. Though the company saw growth in nearly every key metric, share prices immediately dropped. These are the highlights: 

• Total revenue for the fourth quarter increased 41 percent year-over-year to a total of $1.380 billion
• Total revenue included 26 percent growth in Subscriptions Solutions revenue for a total of $351.2 million, 47 percent growth in Merchant Solutions revenue for a total of $1.028 billion, and 23 percent growth in Monthly Recurring Revenue (MRR) for a total of $102 million
• Gross Merchandise Value (GMV) came in at $54.1 billion, which represents an increase of 31 percent year-over-year
• Gross Profit for the quarter totaled $692.7 million – an increase of 37 percent year-over-year 
• Adjusted Gross Profit totaled $700.6 million – an increase of 37 percent year-over-year
• Operating Income totaled $14.4 million, which represents one percent of revenue – Operating Income totaled 12 percent of revenue for the same period in 2020 
• Adjusted Operating Income totaled $130.2 million, which represents nine percent of revenue – Adjusted Operating Income totaled 20 percent of revenue for the same period in 2020 
• Fourth-quarter 2021 delivered a net loss of $371.3 million, which equals $2.95 per basic and diluted share, as compared with net income of $123.9 million or $0.99 per diluted share for the same period in 2020
• Fourth-quarter 2021 delivered adjusted net income of $172.8 million, which equals $1.36 per diluted share, as compared with adjusted net income of $198.8 million or $1.58 per diluted share for the same period in 2020

Full-year results showed substantial year-over-year growth in most areas. Highlights include: 

• Total revenue for 2021 came in at $4.611 billion, which represents a 57 percent increase over 2020
• GMV totaled $175.4 billion, which is an increase of 47 percent over 2020
• Gross Profit increased to $2.481 billion – a 61 percent increase year-over-year 
• Adjusted Gross Profit increased by 60 percent year-over-year for a total of $2.509 billion
• Net Income totaled $2.914 billion, which equals $22.90 per diluted share – a substantial increase over 2020’s $2.59 per diluted share
• Adjusted Net income totaled $814.4 million, which equals $6.41 per diluted share – an increase over 2020’s $3.98 per diluted share

With so much positive news, the sudden drop in share prices following Shopify’s earnings report shocked some investors. What happened? 

Why Did Shopify Stock Go Down? 

It wasn’t necessarily the fourth-quarter or full-year financial results that sent Shopify’s share prices plummeting. Instead, it was the company’s failure to meet analysts’ expectations, coupled with the company’s inability to sustain two years of tremendous growth. 

The fact that Q4 2021 growth came in at 41 percent sounds positive, but in fact, that is the slowest rate of growth in the past four years.

More importantly, Shopify’s management indicated that they expect full-year 2022 growth to come in lower than 2021’s full-year total of 57 percent. When a fourth-quarter loss was added into the equation, investors lost interest in paying a high premium for Shopify stock. 

Is Shopify Undervalued? 

Tech companies typically trade at a high sales to earnings ratio, and Shopify is no exception. Just before earnings were announced, shares were valued around 24 times sales. That has dropped to the low-to-mid teens, which is still relatively high – but reasonable. 

Given the company’s slowing growth and recent losses, the current valuation is more in line with fundamentals. Share prices have taken a big step back from overvalued territory, but it does not appear that Shopify is undervalued.

Is Shopify Stock A Buy? 

Shopify held its IPO in May 2015. Even with the recent decline in value, its stock has returned more than 2,000 percent since inception. Much of that growth came in 2020 and 2021 when brick-and-mortar businesses needed to create an online presence quickly in light of the COVID-19 crisis. In 2020, Shopify’s revenue went up by 86 percent, followed by another 57 percent increase in revenue for 2021. 

It’s true that the need for shifting to e-commerce is less urgent now that the pandemic is winding down, but overall, e-commerce is still on the rise. That means Shopify, as a leader in e-commerce solutions for entrepreneurs, is well-positioned to maintain its upward trajectory, albeit more slowly. 

Analysts are fairly evenly split on whether Shopify stock is a buy or hold, but that really comes down to investment horizon. The outsized returns might not come this year or next, but nearly everyone agrees they will come. With Shopify trading much lower since investors reacted to the fourth-quarter and full-year financial results, now is the time for those with an eye on the long-term to buy Shopify stock.  

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