🛍 Has Shopify's Rapid Growth Phase Ended?
Krispy Kreme reports profit.
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🛍 Shopify: Slowing Fast?
Fifty days into 2022, Shopify’s (SHOP) meteoric share price seems to be in super correction mode. Shares have fallen by half, and the company is warning of lower revenue for the first three quarters of 2022. Does the end of the pandemic mean a growth-dampener for Shopify? (Tweet This)
Pandemic: The Growth Trigger
With brick-and-mortar stores shuttered due to lockdowns, businesses big and small looked to go online. Shopify was a direct winner with its digital outposts for businesses. Companies such as Schwinn, Chipotle, and Heinz turned to Shopify for their services. Chipotle created a virtual farmers' market on the platform while Canada-based grocery chain Loblaws sold meal kits.
If in 2020, Shopify reported Gross Merchandise Value of $5.1B while catering to 44M shoppers between Black Friday and Cyber Monday, 2021 saw GMV of $6.3B and 47M shoppers in the same period. This was despite supply chain snarls that made it difficult for businesses to meet elevated demand.
In the 18 months from March 2020 to September 2021, Shopify's total merchant GMV doubled to $400B. 2020 also saw the company report an annual operating profit of $90M, the first in its 14-year history.
Starting at $332 per share, just as the pandemic began taking hold worldwide on March 19, 2020, Shopify shares ended the year up 350%. In 2021, the shares rose a further 150% to $1762.92. At its peak in 2021, Shopify’s market cap hit $212.1B - lower than Walmart, but double the market cap of Dollar General, Macy's, Kohl's, and Kroger put together.
Shopify also had a 7.6% stake in Buy Now, Pay Later pioneer Affirm. After Affirm went public last January, Shopify's stake was valued at $3.6B. Of course, given Affirm has been in a downward spiral lately, that stake today is worth a measly $76M. Affirm was the subject of this newsletter last week.
"What goes up must come down." - Isaac Newton.
Where’s The Growth?
With the gains seen in its shares late last year, it stands to reason that Shopify was priced, so there was no room for error. Just imagine: for the four quarters from Q2 2020 to Q1 2021, the company reported revenue growth of 97%, 96%, 94%, and 110%. In the last three quarters, that number has come down to 57%, 46%, and in the most recent quarter, 41%.
Remember, we’re still talking growth here! 40+% revenue growth in the last three quarters wasn’t satisfactory enough for the investors. And the shares have been pummeled.
Key Highlights From Q4:
Revenue: $1.38B Vs $1.34B expected
EPS: $1.36 Vs $1.26 expected
Gross Merchandise Volume: $54.1B Vs $52.6B expected and up 32% Y-o-Y
Shopify’s net loss of $371.3M in Q4 was its largest as a public company. In the 27 quarters that Shopify has been listed, it has made a profit in only 7 of them. Three of these quarters were in 2021, and even those profits were due to its investments, not operational profit.
The company expects revenue growth to slow further in the next three quarters, while it expects investments in sales and marketing to start paying off by Q4 2022. The company also expects deceleration as the pandemic ebbs, and online doesn’t hold the same allure as the past two years. Rising inflation also means consumers will be cautious before shelling out dollars to buy things.
To grow revenue, the company also cut down its commission rates for developers who make over $1M annually to 15% from 20%.
The slowing revenue growth has not pleased investors one bit. The dour outlook for the next three quarters has only exacerbated the angst. The result is there to see as well. From the peak in November 2021, shares have declined 65% to a multi-year low. Today's market cap stands at $78.8B - a staggering fall from the lofty height of $200+B just three months back.
The global e-commerce market is likely to grow at a 22.9% CAGR until 2027 to over $16T. Shopify will need to do a lot more than cutting commissions to grab a meaningful portion of the e-commerce market share. Unfortunately, hope is not a strategy, and neither is reliance on the pandemic!
SHOP ended at $626.16, down 4.68%. Shares are down 30% over the last four sessions.
Company Snapshot 📈
SHOP $626.16 -30.72 (4.68%)
Analyst Ratings (35 Analysts) BUY 46% HOLD 51% SELL 3%
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Today's Market Terminology: Hot Money
Hot Money is money that moves across country borders in response to difference in interest rates and that moves away when the difference disappears
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