Why Shopify Plunged by 30% in January

What happened

Shares of Shopify (NYSE: SHOP) plunged by 30% in January, according to data provided by S&P Global Market Intelligence.

The e-commerce platform for entrepreneurs and small business owners saw its stock fall by 43% from its peak of $1,690 back in November last year.

Female entrepreneur looking at mobile phone.

Image source: Getty Images.

So what

Shopify has been one of the pandemic's clear winners; its platform saw a surge in merchants and entrepreneurs who were eager to make use of the company's tools to start small businesses. As an indication of the platform's rapid growth, Shopify's fiscal 2021 third quarter saw gross merchandise value rise by 35% year over year to $41.8 billion while gross payments volume climbed by 46.4% year over year to $20.5 billion. Results have been solid as well, with revenue for the first nine months of 2021 surging by 65.6% year over year to $3.2 billion.

Investors, however, were jittery over Shopify's prospects as pandemic-related restrictions ease in many countries. As e-commerce tapers off from the surge in late 2020 and grows at a more measured pace, Shopify may see slower growth of merchants and recurring income on its platform going into 2022. Furthermore, interest rates look poised to rise as the Federal Reserve has hastened to raise interest rates as soon as March to tame inflation that is running at a four-decade high of 7% for 2021. Shopify has thus far tapped on cheap debt to grow its business -- around $910.4 million of convertible senior notes paying just 0.125% per annum. Any future loan drawdown may incur higher financing costs as interest rates rise, thereby crimping net income further.

Now what

The company is not letting the perceived slowdown affect its plans, though. In the third quarter, it launched Shopify Markets to enable easier cross-border payments for entrepreneurs. It also rolled out Shopify Balance, a money management tool to help merchants with mobile or in-store spending and rewards management. In the fourth quarter, Shopify launched a global ERP program that allows partners such as Microsoft to directly integrate their software into Shopify's app store. It also collaborated with music streaming service Spotify to allow artists to showcase their products directly within their Shopify online stores.

Growth may indeed be slowing, but investors should keep the faith with Shopify as it partners with more companies to increase the attractiveness of its app offerings. The trend of working from home, along with starting one's own business, is unlikely to stop even when the pandemic eases, thereby providing opportunities for Shopify to continue growing its market share over time.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Royston Yang has no position in any of the stocks mentioned. The Motley Fool owns and recommends Microsoft, Shopify, and Spotify Technology. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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