Why Shopify Stock Dropped 3% Yesterday

Shopify’s (TSX:SHOP)(NYSE:SHOP) earnings report was fantastic, but comments around growth took this stock lower yesterday.

| More on:

On Wednesday, Shopify Inc. (TSX:SHOP)(NYSE:SHOP) reported earnings. Its stock fell as much as 7% in early trading before recovering near the end of the day.

Today I’m going to discuss why this stock dropped so sharply, and why this earnings report matters for investors.

Earnings growth expected to slow in 2021

The biggest takeaway from Shopify’s earnings report were comments made by the company that indicated growth in 2021 would not be as good as what was seen in 2020.

That might be expected. After all, 2020 was an absolutely incredible year. “The year of the pandemic” provided accelerated e-commerce growth not many analysts had initially predicted. On the outset of the coronavirus pandemic, expectations were that SME bankruptcies might provide a headwind for Shopify. However, the e-commerce platform provider reported revenue growth of 86% year over year.

The reasons for this slower growth rate this year?

First, Shopify expects a rapid vaccine rollout to result in a return to bricks-and-mortar shopping. Many shopaholics are eager to get back into the mall, preferably without having to wear a mask. If we see a return to normal (or even semi-normal), it’s conceivable e-commerce shopping will take a hit.

Second, the company announced it may not be as aggressive with entering new markets as expected. Shopify’s management team indicated that it may not be “the right time to go really deep” into countries it has on its radar. Rather, expansions to new markets may happen further down the road.

So how were the numbers?

Shopify reported fourth quarter adjusted earnings of US$1.58 per share, handily beating expectations of US.$1.21 per share. The company’s fourth quarter revenue came in just shy of $1 billion, almost doubling last year’s fourth quarter. Additionally, gross merchandize value (the volume of goods flowing through Shopify’s e-commerce platform) doubled last year’s total to more than US$41 billion.

These numbers were excellent. Shopify beat earnings expectations, yet again. One would think a positive earnings surprise would be in the cards. However, the aforementioned comments with respect to forward-looking growth have dampened investors’ outlook.

Bottom line

Shopify is a world-class company absolutely dominating its sector. This company’s growth thus far has far exceeded what many investors thought was possible a few years ago.

However, the bar is continuously raised each and every earnings beat. Investors continue to expect a year-over-year doubling of revenue from this company. Whether or not that’s sustainable for any extended period remains to be seen. These comments have suggested the company’s management team is skeptical of such an idea.

There was likely some profit-taking yesterday, which is understandable. Given how high expectations were coming into this earnings report, any sort of inkling of reduced growth was prone to induce a sell-off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Tech Stocks

Man data analyze
Tech Stocks

3 Reasons Celestica Stock Is a Screaming Buy Now

These three reasons make Celestica stock a screaming buy for long-term investors.

Read more »

profit rises over time
Dividend Stocks

These 2 Dow Stocks Are Set to Soar in 2025 and Beyond

Two Dow Jones stocks are screaming buys but Canadians must hold them in an RRSP or RRIF to avoid paying…

Read more »

telehealth stocks
Tech Stocks

Well Health Stock: Buy, Sell, or Hold?

Another record-breaking quarter and strong demand sets the stage for continued momentum for Well Health stock.

Read more »

3 colorful arrows racing straight up on a black background.
Dividend Stocks

TSX Stocks Soaring Higher With No Signs of Slowing

Three TSX stocks continue to beat the market and could soar higher in an improving investment landscape.

Read more »

profit rises over time
Tech Stocks

2 Non-AI Tech Stocks to Buy in November for Better Returns

Not all AI stocks are riding the hype train, and for many investors, well-understood and predictable growth stocks might be…

Read more »

worry concern
Tech Stocks

In a Few Years, You’ll Probably Regret Not Owning BlackBerry Stock

Here’s why I believe BlackBerry could be one of the most overlooked Canadian tech stocks right now.

Read more »

A worker uses a double monitor computer screen in an office.
Tech Stocks

Is Constellation Software Stock a Buy for its 0.25% Dividend Yield?

Here's what investors may want to consider when it comes to Dollarama (TSX:DOL) and its relatively low dividend yield.

Read more »

Nurse talks with a teenager about medication
Tech Stocks

Shares of WELL Health Just Zoomed. Is It a Buy?

Given its improving financials and healthy growth prospects, WELL Health could deliver superior returns over the next three years.

Read more »