Summary
- Shopify’s shares fell by approximately -67% from their all-time high in November last year. This is because Shopify’s valuations were de-rated due to expectations of weaker earnings growth and revenue.
- SHOP will likely experience significant margin compression in 2022. This makes it less likely that SHOP’s share price will rebound significantly in 2018.
- Shopify is a Hold. I believe in its long-term outlook but don’t expect a significant rebound in shares anytime soon.
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Elevator Pitches
My Hold rating for Shopify Inc. (NYSE: SHOP), shares is maintained.
I discussed SHOP’s “long term growth potential” as well as “short-term headwinds” in my previous article , published October 26, 2021. In particular, I stated that “a slowdown is SHOP’s topline & bottom line in short term” and that Shopify’s valuation de-rating could continue for some time. My latest article examines whether SHOP’s share prices will continue to fall, or if there is a rebound in light of Shopify’s significant share price correction over the past months.
It is difficult to predict a Shopify share price rebound this year, given the expectations of moderation in topline growth and lower profitability in 2022. A further drop in Shopify’s stock prices is unlikely due to its recent valuation de-rating, which has taken into account most of these headwinds and its long-term growth potential.
Shopify Stock Has Fallen Why?
Shopify’s stock price hit an all-time record $1762.92 in intra-day trading on November 19, 2021 and is forecast to generate higher Return on Assets (8.56%) than the US Software – Application industry average (4.67%). The company’s previous traded share price, $587.65, is less than a third off its historic peak. Shopify’s shares fell by -65% over the past six months, compared to a mild -7% decline in the S&P 500.
SHOP’s Historic Stock Price Performance for The Last Six Months
SHOP shares fell significantly as the company failed to meet market expectations.
Shopify’s quarterly revenue was +5 percent higher than the consensus topline forecasts of the sell-side for each quarter between Q1 2020 & Q2 2021. SHOP’s Q3 2021 revenues fell by -2% from market expectations. Although the company’s Q4 2021 revenue was better than Wall Street analysts expected, it still fell short of market expectations. However, the most recent quarterly revenue beat was only about +3%.
Shopify’s Quarterly Income Beat
Separately, in the chart below, the chart shows that sell-side analysts have aggressively lowered Shopify’s future earnings per shares forecasts in the past few months.
Revisions to SHOP’s Quarterly Consensus Earnings per Share Estimates in Recent Months
It is not surprising that Shopify’s valuations were de-rated according to historical valuation data from S&P CapitalIQ. The trailing twelve-month Enterprise Value-to–Gross Profit multiple of SHOP decreased from a peak at 108 times on July 23, 2021, to 24 times by March 9, 2022. Shopify’s forward 12-month consensus Enterprise Value-to–Revenue multiple decreased from 41.9x as of July 23, 2021, to 9.6x at the close on the March 9, 2022 trading session.
The next section will examine Shopify’s key metrics based on its Q4 2021 results. It will help you understand why future expectations for Shopify’s topline have slowed significantly.
SHOP Stock Key Metrics
Pay attention to a number of metrics revealed in Shopify’s Q4-2021 financial results release.
Revenue growth is the first key metric.
Shopify’s fourth quarter revenue was higher than market expectations. However, it was still a mild +3% revenue increase as I mentioned in the previous section. SHOP’s topline has increased by +41% YoY, and its revenue growth has slowed significantly. Shopify’s YoY topline growth was greater than +90% in four consecutive quarters, between Q2 2020 & Q1 2021. SHOP’s Q2 2021, and Q3 2021 revenue growth rate were both significantly higher at +57% YoY (and +46% YoY respectively).
Shopify presented its Q4 2021 results to, stating that the company’s revenue growth in 2022 will be “still rapid” and “outpacing (the overall) growth of e-commerce (market). However, it acknowledged that the topline growth for this year is expected to be lower than 2021’s 57% increase in revenue.
MRR, or Monthly Recurring revenue, is the second important metric.
Shopify’s MRR rose by +23% YoY to $102 Million in the fourth quarter 2021. The market expected a +27% YoY rise in SHOP’s MRR according to consensus estimates from S&P Kapital IQ. SHOP’s YoY growth in MRR was much faster at +33% during Q3 2021.
SHOP’s fourth quarter earnings media release highlights that MRR is a metric used by management to predict subscription solution revenue in the future, provided merchants keep their subscription plan for the next month. This means that Shopify’s future revenue growth in the subscription solutions segment may slow down going forward.
Shopify is seeing positive results with larger businesses as its ShopifyPlus offering’s (targeting these larger businesses) contribution to overall MRR has increased from 25% to 29% in the fourth quarter of 2020 to 29% for the fourth quarter of 2021. This means that SHOP’s Plus MRR increased by +42% YoY during the fourth quarter last year while its non-Plus MRR rose by a moderate +17% during the most recent quarter.
Profit margin is the third important metric.
Shopify’s Q4 2020 gross profit margin fell from 51.6% to 50.2%, while its Q4 2021 EBIT margin dropped from 21.0% and 9.4% during the same time. SHOP’s Q4 2021 gross margin and EBIT margin were also lower than the market consensus’ forecasts according to S&P Kapital IQ.
SHOP said that the margin contractions in the most recent quarter were due to “a significantly higher mix of our lower margin Merchant Solutions revenues compared to the prior year” during the Q4 2021 earnings conference. The merchant solutions segment’s revenue contribution (as opposed the subscriptions solutions segment), had increased from 52% to 75% in quarter four 2020.
My opinion is that Shopify’s share prices will rebound in the future if it meets its profitability expectations. I discuss this in more detail in the next section.
Can Shopify Stock Rebound
Shopify’s share price is unlikely to rebound significantly from where it was a few months back. SHOP will have lower profit margins in the coming year.
Shopify stated that the increase in Merchant Solutions within our overall revenue mix will mean gross profit dollar growth will follow revenue growth (as previously discussed). SHOP stated that it will continue “reinvesting back into our business aggressively through 2022” and “deploying all our gross profit dollars.”
SHOP also stated at its most recent quarterly earnings briefing that it expects capital expenditures will grow from $51 million in FY 2020 to $200 million by FY 2022. Capital expenditures will increase to $1 billion over the next two years (FY 2023 & FY 2024). This is mainly due to the accelerated investments in Shopify Fulfillment Network (or SFN), which the company refers as. A “fulfillment service“, which gives “your business a competitive advantage with two-day delivery at a predictable price that includes inventory management, delivery and free storage for every unit purchased within six months with no up-front cost, is what this relates to.
Shopify, as highlighted in the quarterly earnings call, aims to “enable 2-day shipping coverage” for more than 90% of Americans through its increased investments in SFN. Shopify must continue to provide value to its merchants as well as drive long-term revenue growth. Shopify’s assets and capital intensive nature will make it more difficult for SHOP to see a meaningful and quick rebound in its shares.
What’s the Future of SHOP Stock in 2022?
Shopify will face a difficult year in 2022, according to its consensus financial forecasts, sourced from S&P Kapital IQ.
Analysts on the sell-side expect Shopify’s revenue growth will slow from +57% in fiscal 2020 to 31% thisyear. This aligns with management guidance (lower revenue growth for 2022), which I mentioned earlier in this article.
SHOP’s gross margin and EBIT margin will contract by -210 and -860 respectively to 51.9%, and 7.0%, respectively, in FY 2022. Shopify’s profitability will suffer in fiscal 2022 due to unfavorable revenue mixes, increased capital expenditures, and continued reinvestments.
Shopify’s share prices will likely remain range bound in 2022, with negatives due to lower revenue growth and lower margins being heavily priced in.
Is SHOP stock a buy, sell, or hold?
SHOP stock is considered a Hold. Shopify, as I stated in my October 26, 2021 article was a Hold. The company has a long growth runway. It “boasts higher revenue contribution from non US markets and an increased percentage of earnings from merchant solutions in ten years.” Shopify’s capital appreciation upside will be limited if it experiences lower profitability in 2022.
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