For Shopify investors, it has been a stellar run from March 2020 until this year. This year, stocks of Shopify lost their momentum. Those who bought the stock a year ago have probably lost over 70 percent. However, earlier the case was entirely different. Since the Canada-based company went public in May 2015, it has risen by over 1,300 percent.
The newcomer investors are now frustrated and want to know the reasons behind the sinking value of Shopify shares. To help them understand better, nasdaq.com has shared some potential reasons behind the same.
Two-Year Low From Record Highs
The coronavirus pandemic boosted Shopify’s growth as global lockdowns forced shoppers to resort to online shopping. Small, medium and big companies scrambled to establish their online presence in order to stay afloat and fulfil the soaring online demands. This led to a surge in demand for the tools and services of Shopify. The company’s revenue zoomed 86 percent in 2020 and soared 57 percent last year. However, as lockdowns lifted across the globe, shoppers returned to the physical stores and Shopify failed to sustain the phenomenal growth.
In the U.S, the e-commerce penetration rate decreased from 15.7 percent in the second quarter of 2020 to approx. 12.9 percent in Q4 2021. Shopify and other e-commerce companies were affected by the trend. In the first quarter of 2022, the gross merchandise value and revenue of Shopify rose only 22 percent and 16 percent year over year, respectively. Though good enough, it disappointed investors as they expected skyrocketed growth. Most likely, investors got discouraged and sold the stock.
Challenges For Shopify
Besides slow growth, Shopify has had to tackle other external challenges as well. First on the list is the switch in the general sentiments of investors for the high-growth yet unprofitable company. Investors turned pessimistic from optimistic. There are a few potential reasons behind this. Firstly, the rising inflation, which has led to multiple hikes in the interest rates and more are expected in the next quarters.
A high-interest rate market is not appropriate for stocks, especially for high-growth businesses such as Shopify. As most of its cash flow will be generated in the distant future, a higher interest rate will decrease the current value of these future cash flows. Simply put, the company’s intrinsic value will diminish as the interest rate increases. Hence, investors will obviously leave the stocks with declining value.
Apart from this, investors are shifting to preservation mode from an expansionary mindset as the external environment is becoming volatile amidst geopolitical conflicts and economic challenges. As per the website, there is evidence that investors now chose well-established and profitable firms over high-growth yet loss-making companies, for example, Berkshire Hathaway.
Expectations
Though the beginning of 2022 was disheartening for Shopify, if compared to the recent trends, the management expects the highest growth in the fourth quarter of the year. Shopify is expected to expand at high rates, though the growth rates won’t be equal to the peak pandemic period. As the e-commerce penetration rate is low in the U.S., further penetration will prove to be beneficial to all e-commerce businesses. In addition, Shopify possesses growth levers that it can pull to its use such as venturing into new geographies, attracting promising new customers and increasing the wallet share of customers by adding new tools.
