Shopify (SHOP -1.62%) rallied hard during the pandemic as people forced out of work by stay-at-home rules raced to the internet to launch online businesses. Revenue more than tripled during the three-year period between 2019 and 2022, growing to $5.6 billion.
Yet after a period of profitability, the online e-commerce platform provider has returned to its money-losing ways, generating a net loss of almost $3.5 billion last year, and Shopify is forecasting more losses to come.
Image source: Getty Images.
The business was hurt when a reopening economy started to mean a return to normalcy for many in the workplace, and Shopify's stock reflected the trend, losing 84% of its value over the course of the year ending last October. From that low point, though, the shares soared some 126% before partly reversing course after the latest results.
It seemed like Shopify stock was starting to rediscover its mojo. Can it last? Or will it collapse again under the weight of mounting losses? Let's weigh the bear and bull cases to find out.
Everything is fine
Shopify is not the same company that went public seven years ago. It has expanded beyond the narrow confines of helping small businesses establish an internet presence and become a vertically integrated operation offering a suite of apps that can be plugged into a merchant's website for greater functionality.
In addition, Shopify now offers customers point-of-sale capabilities, payments options, small business loans, and multichannel opportunities for businesses to sell on social media. It's also building out its own fulfillment and logistics network, and recently acquired Deliverr for $2.1 billion in a bid to create an end-to-end fulfillment ecosystem.
While Shopify hasn't forgotten its humble small- and medium-sized business beginnings, the platform now calls some of the biggest corporations its clients, including General Mills, Heineken, Kraft Heinz, Mattel, Black & Decker, and ButcherBox.
Gross merchandise value jumped 12% in 2022 to $197 billion and was up 16% on a constant-currency basis as total revenue soared 21% from last year. Gross profit dollars also rose $2.8 billion, or an 11% increase compared to 2021.
Although Shopify trails well behind Amazon, it actually has the second-largest share of U.S. e-commerce retail sales. As online shopping continues to become the norm for millions of consumers, and Shopify makes easily accessible tools available for businesses of all sizes, there doesn't seem to be any impediment to the e-commerce platform provider growing further.
Image source: Getty Images.
The sky is falling
Maybe not so fast. On the surface Shopify looks good, but scratch just a little deeper and there are some concerning signs.
Even though it reported subscription solutions revenue jumped 14% from last year, monthly recurring revenue (MRR) was only 7% higher. And while it includes some one-offs in the subscription solutions category, such as selling apps and registering domain names, there seems to be a big disconnect between the growth of subscriptions and how much recurring revenue it generates monthly. They should align much more closely.
Even so, Shopify says its MRR "is most closely correlated with the long-term value of our merchant relationships," so that's what investors should be watching, though President Harley Finkelstein downplayed the importance of simply counting the number of new merchants Shopify adds to its rolls.
Yet, all the new products Shopify is offering its clients are seemingly lower-margin items because gross profits slid to 46% of revenue compared to 50.2% last year. The Shopify Payments platform is contributing a larger percentage of lower-margin revenue, as well as more customers using credit cards more often than debit cards. But the biggest contributor to margin erosion was the addition of Deliverr to its business.
All this comes as Shopify's operating expenses skyrocket. Research and development was up 61% year over year, while general and administrative expenses more than doubled, also likely from Deliverr's inclusion. That's also why the amount of stock-based compensation Shopify issued stood at over a half billion dollars, or 20% of gross profits.
Is the glass half full or half empty?
Investors love to see growth at their businesses, but it needs to be profitable growth -- otherwise the company can't survive the weight of the losses. Shopify has shown it knows how to make a profit, but it may be trying to do too many things at once.
Being all things to all people is a difficult game to play, and it's often better for a company to abide by the motto of "do one thing and do it well."
So far merchants of all sizes seem to like what they've found at Shopify, though at its scale it should be able to reliably produce profits. I still believe that will come for the e-commerce platform provider, but with the gains Shopify stock has already made, I'm not sure I'd be a buyer at this price.
