Kalkine Media - On Monday, Shopify (TSX:SHOP) (TSX:SHOP) stock experienced a decline of 1.83% from the opening of trading Monday to Tuesday’s opening. No major news about the company surfaced on that day to explain this downward momentum. It's plausible that the dip was linked to the movement in U.S. markets: the NASDAQ-100 index dropped by 2.36% on Monday, a move that mirrored the decline in Shopify’s stock. Although Shopify is a Canadian company, a significant portion of its revenue comes from the U.S. market, making its stock correlated with U.S. tech stocks, including those listed on the TSX technology stocks index.
Tech Earnings Outlook:
Another factor that could be contributing to apprehension about Shopify is the anticipation of the company’s upcoming earnings release. Shopify is scheduled to report its earnings for the first quarter of 2024 on May 2, covering the period from January 1 to March 31. There are concerns that tech companies might struggle to impress investors with their earnings for this period. While big tech companies experienced robust growth throughout 2023, they now face the challenge of surpassing the earnings results set during that period. Therefore, it might be challenging for them to meet investor expectations when they release their earnings.
For Shopify, investors have been worried about revenue deceleration for some time. The company's growth reached its peak in 2021 when revenue almost doubled. However, in the most recent quarter, growth slowed to 24%. Although 24% growth may seem healthy, Shopify was previously priced for even stronger growth before it began to decline in 2022. While the stock is not as expensive as it was at its peak in 2021, it still trades at 13 times sales. If growth continues to decelerate, the stock could react negatively to its upcoming earnings release.
Intensifying Competition in E-commerce:
Another potential challenge for Shopify is the intensifying competition in the e-commerce sector. The emergence of Chinese platforms like Temu and Shein, which provide direct access to Chinese products, has disrupted the traditional e-commerce landscape. This competition has affected players like Amazon (NASDAQ:AMZN), which lost 2.6 million customers after Temu entered the U.S. market. Investors may be considering this competitive landscape when evaluating Shopify's stock.
Positive Developments:
Despite these challenges, Shopify has several positive developments underway. The company recently reported two consecutive quarters of positive free cash flow, indicating profitability. Additionally, Shopify has attracted numerous celebrity and high-profile brand vendors, whose fees could increase significantly over time. Furthermore, Shopify has introduced generative artificial intelligence (AI) tools to assist vendors in creating compelling product descriptions quickly. This innovation has the potential to save vendors time and effort, potentially driving more businesses to host their stores on Shopify.
Given these factors, investors should weigh the risks and opportunities associated with Shopify's stock before making investment decisions.