It’s the summer heat wave for an e-commerce company Shopify (STORE -6.26%). The stock is down 77% year-to-date given historically high levels of inflation and the reopening of the global economy, which has brought consumers back to physical stores. But macroeconomic conditions aren’t the only thing negatively affecting e-commerce stock right now.
In its most recent quarter, the company posted a big net loss, quite the no-no in times of economic uncertainty. So what exactly is going on with Shopify’s bottom line? And will the e-commerce software business rebound in the years to come? Let’s take a closer look at his current situation to find an answer.
Shopify faces a series of headwinds
In the second quarter, Shopify’s total revenue grew 15.7% year-over-year to $1.30 billion. That sounds good on the face of it, but it doesn’t even compare to the 56.7% rise the company announced in the same quarter last year. Meanwhile, it suffered a net loss of $1.20 billion, a starkly different result from its net profit of $879.1 million in the year-ago quarter. In the first half of 2022, the e-commerce company generated a total net loss of $2.68 billion. Ouch.
So why is Shopify’s bottom line in the red these days? The company’s operating expenses rose 76% year over year to $845.9 million in the second quarter. And while that contributed to the company’s operating loss of $190.2 million during the period, its net loss of $1.20 billion could be primarily attributed to its equity stakes in Affirm holdings and Global-E online.
In the second quarter, Shopify’s unrealized loss on its various investments totaled $1.0 billion, making up most of the red ink on its bottom line. Affirm and Global-E Online have seen their prices plummet 78% and 48% respectively since the start of the year, as part of the ongoing market correction.
That said, the company is indeed investing a lot of money into its platform with the goal of helping merchants expand their growth and reach. And management said it will invest approximately $1 billion in the Shopify fulfillment network throughout 2023 and 2024. While this and similar initiatives may pay dividends in the future, they are extremely capital intensive. and will continue to put pressure on profitability for the foreseeable future. coming.
Will Shopify get back on track?
Shopify faced a very unfortunate situation. Record inflation and a softening e-commerce environment are putting pressure on its bottom line, while its spending increases on new offerings and services. Don’t get me wrong, these investments could pay off in the long run. As an example, two-day delivery for consumers buying from businesses powered by Shopify could add a lot of value to the e-commerce platform in the long run, but its deteriorating profitability is not very attractive in today’s macro environment.
Overview: Shopify is still well positioned for success. Last quarter, e-commerce sales accounted for just 14.5% of total US retail sales. Online sales are expected to grow 50% over the next four years, topping $7.4 trillion by 2025, according to Statista. With a 31% market share, Shopify is the largest e-commerce software platform in the United States.
Investors have every right to be concerned about the company’s recent trajectory, but it’s also important to keep the long term in mind. With nearly $7 billion in cash and marketable securities on its balance sheet and a debt-equity ratio of just 14%, the company has the financial stability to weather any economic storm and pursue its ambitious vision.
Is Shopify stock a buy?
Even after losing 77% of its value since the start of the year, the e-commerce stock is still trading at just over eight times sales. That’s an expensive valuation on its own, but it’s also a premium for competitors like BigCommerce and Wix.com, which sport price-to-sale multiples of 4.5 and 3.2, respectively. Thus, the company has more headroom before it is officially called cheap.
If you already own the stock, I suggest keeping it. Shopify has a bright future ahead of it despite these recent pitfalls. But if you’re looking to start a position, I’ll sit on the sidelines for now. There are better opportunities in e-commerce right now.
Luke Meindl has no position in the stocks mentioned. The Motley Fool holds roles and endorses Affirm Holdings, Inc., BigCommerce Holdings, Inc., Global-e Online Ltd., Shopify, and Wix.com. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.