Down 74%, Should Smart Investors Buy Shopify Stock During the Bear Market?

The e-commerce industry has been in the worst shambles in recent memory. On one hand, it makes a lot of sense. The pandemic pushed many people — rather involuntarily — to resort to online shopping, expediting the secular trend and clouding the overall growth picture.

But now that the global economy has largely reopened, the tables have turned quite a bit. According to U.S. Census data, e-commerce sales represented 14.3% of total retail sales in the first quarter of 2022, down 14.9% from a year ago and marking its second consecutive quarterly decline.

Of course, these latest trends have adversely impacted online shopping-focused businesses like Shopify(NYSE: SHOP), which has watched its stock price plummet 74% year to date. The company, which allows entrepreneurs and businesses to easily build and customize online stores, released its latest earnings report on July 27, providing investors a further sneak peek into the dynamics of the present-day e-commerce arena.

In light of unfriendly macro conditions, is it time for shrewd investors to buckle up and buy shares of the leading e-commerce software stock?

Image source: Getty Images.

Shopify continues to struggle

In its second-quarter outing, the e-commerce software leader grew total revenue by 15.7%, and it reported a net loss of $0.95 per share, creating a large gap from its positive $0.69 earnings per share in the same quarter last year. The gloomy top- and bottom-line results, which both missed Wall Street forecasts, came soon after the company stated that it would be cutting its workforce by 10%.

To no surprise, management noted in the earnings release that high inflation and the rising interest rate environment will be hard on its business for the remainder of the year. The company referred to 2022 as a “transition year,” wherein the e-commerce industry has reset to its pre-COVID trend line.

On a more positive note, the Shopify’s monthly recurring revenue (MRR) climbed 12.7% year over year to $107.2 million, signaling that more merchants are still joining the platform, and its gross merchandise volume (GMV) expanded 11.1% to conclude at $46.9 billion. GMV represents the total dollar value of orders facilitated via Shopify’s platform.

For fiscal 2022, Wall Street analysts estimate that the company’s total revenue will increase 19.9%, to $7.1 billion, and that earnings will return to the red, at -$0.07 per share, versus a positive $0.82 a year ago. Next year, analysts predict its top line to grow another 21.9% and the company to report a positive bottom line of $0.06 per share.

Nevertheless, the pandemic really muddied the waters for Shopify’s growth story, and it’ll likely take a few years for the situation to fully sort out. But given its solid market positioning and the upward trajectory of the e-commerce market, I do think we’ll see a day when the company is consistently profitable.

And now that it’s trading at 9.2 times sales, which easily falls short of its five-year average price-to-sales multiple of 32.7, it might be a good idea for investors to check the stock out.

What should investors do right now?

While not apparent now, Shopify is still advantageously positioned for robust growth in the coming years. The company is responsible for 31% of U.S. websites that are using e-commerce technologies, making it the largest e-commerce software platform nationwide, and its global market share is 21%, second to competitor WooCommerce.

Knowing that, and also being aware that the global digital commerce market is forecast to rise at a compound annual growth rate (CAGR) of 15.1% through 2030, investors should be intrigued by the company’s fresh sell-off. In my view, Shopify remains a wonderful long-term play for those who are willing to endure some short-term growing pains.

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Luke Meindl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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