The share price of e-commerce and merchant solutions company Shopify (NYSE:SHOP) plummeted on Wednesday after management released its full-year results for 2021. The US stock dropped by over 16%, but what was in this earnings report that has investors spooked? And is this actually a buying opportunity for my portfolio? Let’s explore.
Solid earnings vs Shopify share price
Despite what the plummeting Shopify share price would suggest, earnings were actually pretty impressive, in my opinion. Total revenue came in 57% higher than a year ago to a record $4.6bn. And thanks to drastic improvements in margins, net income exploded from $319.5m to $2.9bn. That’s an 800% jump!
What was behind this growth? Looking at the operational highlights, this business has been quite busy.
- Its Buy-Now-Pay-Later payment solution was rolled out to all its US merchants.
- The company has formed new payment partnerships with Alphabet (Google), Meta Platforms (Facebook), Microsoft, Oracle, Spotify and TikTok.
- Its Point-Of-Sale devices were rolled out across the UK, Australia, Germany, New Zealand, and the Netherlands.
- Shopify’s shipping & logistics network has expanded to the UK making it available to all merchants using the platform in the region.
Needless to say, this is all quite encouraging. But with seemingly stellar operational performance combined with record financial achievements that beat analyst expectations, it begs a simple question. Why did the Shopify share price drop by double digits?
Investigating investor concerns
Like many growth stocks today, it seems investors are less interested in current achievements and more concerned about the future. In the case of Shopify, management’s guidance for 2022 is what appears to have sent the share price crashing.
The group expects revenue growth to be lower in the first quarter of 2022. This is due to a change in contract terms with platform app & theme developers, as well as weakening e-commerce tailwinds from the pandemic.
The change in contract terms ultimately doesn’t matter, in my opinion. It tweaks the accounting practises of the business, but overall income isn’t harmed. As for the slowdown in e-commerce adoption, this is hardly a surprise, given the pandemic created an exceptional environment. But it’s worth noting that the company expects its 2022 fourth-quarter results to once again break records. So is this a great time to buy?
A buying opportunity?
Even after Wednesday’s tumble, Shopify’s share price still trades at a lofty valuation with a price-to-earnings ratio of 33. This opens the door to a lot of volatility. And if first-quarter revenue comes in lower than investors are expecting, I wouldn’t be surprised to see the stock take another tumble.
However, in my opinion, the concerns surrounding this business are overly short-term focused. And as a long-term investor, this volatility looks like an opportunity. That’s why I’m tempted to snatch up some more shares for my portfolio today.
