A little over six years ago I wrote my first article about Shopify (NYSE:SHOP) and my third about Seeking Alpha, where I described the company as a unique opportunity to invest in human determination to succeed the advent of the internet. Shopify remains a world class company, always has been. The underlying business processes were geared to ride the rising tide of commerce, initially via the Internet, with the initial narrative being that the world’s population was increasingly losing touch with the brick-and-mortar retail that shaped their cities and towns in the decades before. But Shopify is essentially a call option for growth in both online and brick-and-mortar retail. The current malaise is mainly due to the poor economic situation at large online marketplaces such as Amazon (AMZN), Etsy (ETSY) and coupang (CPNG) also reported a significant year-to-date decline in its common stock and a slowdown in revenue growth.
Shopify’s growth in its most recent reported quarter was 15.7%, ahead of Amazon, Etsy, and Coupang. These were all companies that just a few quarters earlier were reporting substantially higher earnings due to the unique trading conditions created by the pandemic. Growth has essentially normalized back to what would have been the trend, with the exception of the stay-at-home order period, when growth skyrocketed. However, the currently realized growth has been weakened by the economic environment.
The bulls will win in the long run
Successive macroeconomic hits have disrupted the global economy and set the stage for a collapse in consumer confidence and real incomes. For example, US wages rose 8.57% in August from a year earlier, the slowest growth in a year.
Also, if you adjust these growth numbers for the still-hot inflation numbers, you get near-negative real wage growth. This has drastically impacted consumer confidence, which is languishing near record lows.
The latest University of Michigan consumer sentiment number for October rose to 59.8, 9.8 points above the all-time low hit in June. To put it bluntly, consumer confidence fell to its lowest level on record just a few months ago. That was worse than the 2020 pandemic, the 2008 financial crisis, the 2001 dot-com crash, and the 1973 Arab oil embargo. Although inflation is expected to fall to around 2.5% towards the end of calendar 2023, there always is there is still considerable uncertainty about the state of the global economy.
The macroeconomic shock from supply chain disruptions, high energy prices and the ongoing fall in real wages has left households in a state of paralysis. As a result, discretionary budget spending has been cut to a low. This is the picture reflected in most of the world’s developed economies. Things are bad, and Shopify is fully exposed to its swings. With the current dire economic backdrop expected to continue into the second half of next year, I don’t expect Shopify to report the kind of sales growth that its shareholders have been anticipating for a while. But the company is still chasing a $160 billion total addressable market.
This retracement is temporary
Shopify’s current problem is slow growth at a valuation that, while down from its highs, would still pose problems for a value-oriented investor. The company was and always will be in an elite category of companies that were pioneers and eventually dominated their respective markets. The reason for the significant slowdown in growth is multi-faceted, reflecting year-on-year comparisons through the extremes of the pandemic and now the poor economic environment. And while there are a number of competing platforms, none have the size and breadth of Shopify, with most also suffering from offering the same level of functionality.
At its current stock price, Shopify has essentially wiped out over three years of capital gains. This could open up an opportunity to start building shares once economic trends turn in the company’s favor again. Yes, growth has slowed, but it’s slowed for everyone, and Shopify is still growing faster than its peers.
The company builds the infrastructure for trading. One that powers millions of websites and processes billions in gross merchandise value per year.
Shopify trails just below Amazon, with a 10.3% share of U.S. retail e-commerce sales for 2021. This underscores the company’s strong positioning and strength. Crucially, Shopify is mission-critical software for millions of businesses that use their platform to support their livelihoods and ambitions. Although global economic conditions are likely to keep the bulls on the heels for longer than desired, the longer term bull case is clear. Shopify is an analogue of global commerce and fully reflects its underlying drivers. If the headwinds ease at some point, the company will be able to continue to build on its strong market share.