Why Shopify Stocks Are Falling

What is Happening in The Market

Shopify's stock dropped more than 18 percent on Wednesday as the firm forecasted a revenue contraction in the first half of 2022 as the Covid-19 pandemic's online shopping boost faded. The shares of Shopify Inc. fell to their lowest level in almost two years on Wednesday as the e-commerce behemoth warned that sales growth would stall this year as the world relaxes regulations aimed at combating the COVID-19 epidemic.

For an illustration purpose, we can look at the data and show that stocks have dropped 35% since the mid of February. People are getting excited over the market's future with its current chances of climbing the ladder. At the same time, some are afraid who invest in stocks. 

With projections for a slowdown in topline growth and lower profitability in 2022, it's challenging to see Shopify's stock rising significantly this year. However, given its recent value de-rating (which now has factored in most of these obstacles) and long-term growth potential, a further drop in Shopify's stock price seems improbable.

Why Are Stocks Keep Falling?

Shopify shares dropped by -65% in the past six months, which is significantly more brutal than a relatively mild -7% decline for the stock during the same time frame. On November 19, 2021, Shopify's stock price reached an all-time high of $1,762.92 during intra-day trading, while the company's latest traded share price of $587.65 is barely about a third of its historical high.

For every quarter between Q1 2020 and Q2 2021, Shopify's precise quarterly revenue was at least +5% greater than the sell-consensus side's topline projections. However, SHOP's sales for the third quarter of 2021 fell 2% short of market estimates. Although the company's Q4 2021 topline above Wall Street expectations, the last quarterly revenue beat was just about 3%.

Even though Shopify's fourth-quarter sales exceeded market forecasts, it was only by 3%, as I said in the previous section. However, on the plus side, Shopify is gaining headway with larger organizations, with its Shopify Plus service (targeting this category of larger firms) to total MRR increasing from 25% in Q4 2020 to 29% in Q4 2021.

Where is Stock Heading This Year?

In 2022, Shopify's stock will most likely trade in a range, with disadvantages such as slower revenue growth and reduced margins already factored in. According to S&P Capital IQ's consensus financial estimates for Shopify, 2022 will be challenging for the firm.

In fiscal 2022, Shopify's profitability will be hampered by an unfavorable revenue mix, continuing reinvestments, and more significant capital expenditures. Although the stock SHOP is rated as a hold, Shopify has a lengthy growth runway. On the other hand, Shopify's capital appreciation upside will be limited in the short run due to lower profitability in 2022.

According to a widespread financial proverb, never try to "catch a falling knife.”. The logic is straightforward. It's difficult to predict when and where a stock will eventually settle while in free collapse. Nevertheless, the tide is turning against it. As a result, it's advisable to remain on the sidelines until the dust settles. We don't want to be sucked into a downward trend.

Conclusion

All of the factors mentioned above might be contributing to dwindling investor interest in Shopify stock. In addition, the response to the results announcement was overly enthusiastic in a general perspective. However, when all of the criteria mentioned above are considered together, a correction is justified. 

With interest rates and the Ukraine conflict causing uncertainty, the bearish feeling toward tech companies may probably last. SHOP's sales have dropped to 16 times their previous level. Even with lower values, it is still costly.