Shopify stock just tanked. Buy, sell, or hold?

Earlier this week, the Shopify (NYSE: SHOP) share price tanked after the company posted its Q4 earnings. It seems investors were unimpressed with the online shopping powerhouse’s guidance for 2022.

This is a stock I own, and after this week’s share price fall, I’m now sitting on a loss. This is quite frustrating, given that, at one point, I was up over 50% on my purchase price. So what’s the best move now with Shopify stock? Should I buy more, hold, or sell? Let’s take a look.

Shopify stock: what’s the best move now?

The first thing I want to know here is whether the growth story is still intact. And looking at the group’s Q4 results, I’m convinced it is.

For Q4, total revenue was $1.38bn, up 41% year-on-year and above the consensus forecast of $1.34bn. Within this, Subscription Solutions revenue grew 26% year-on-year while Merchant Solutions revenue was up 47% on a year ago.

Meanwhile, for 2021, total revenue for the full year was $4.6bn, an increase of 57% year-on-year, while gross merchandise value (GMV) was $175.4bn, an increase of 47% over 2020.

Looking ahead, Shopify said it doesn’t expect the same level of growth in 2022, due to the absence of lockdowns and government stimulus. However, it still expects ‘rapid’ growth that outpaces the general e-commerce market.

Overall, I’m comfortable with the growth here. I wouldn’t expect 2022 gains to be as high as they were during the pandemic when consumer behaviours changed dramatically.

Earnings growth

The next thing I want to know is whether the company is actually making any money. With interest rates rising, I think it’s likely to be a challenging year for companies losing a ton of money.

Shopify’s earnings for 2021 were quite encouraging to my mind. For the year, operating income was $268.6m (6% of revenue) versus $90.2m (3% of revenue) in 2020. Meanwhile, adjusted net income amounted to $6.41 per share versus $3.98 a year earlier.

This profits growth is encouraging. However, it’s worth noting that in Q4, adjusted net income per share ($1.36) was down on the figure posted for Q4 2020 ($1.58).

Valuation

Of course, I also want to look at the valuation. All of a sudden, valuations have become very important.

Shopify’s valuation is still quite high, even after the share price pullback. For 2022, analysts expect the company to post earnings per share of $6.52. That means the forward-looking P/E ratio is about 115.

This valuation does add considerable risk. If 2022 growth is disappointing, I’d expect the stock to be highly volatile.

Other risks to consider

And it’s worth pointing out that the valuation is not the only risk here. A slowdown in online shopping is another risk to consider. There’s no guarantee the e-commerce industry will do well after the pandemic.

Competition from rivals is also worth thinking about. Shopify rivals include the likes of Amazon, eBay, and Etsy. These companies could steal market share.

Shopify stock: my view now

Putting all this together, I see Shopify as a ‘speculative buy’ for me at the moment. It’s not a stock I’d load up on due to the fact that the valuation is so high. However, I’d be comfortable buying a small position at today’s share price as I think this company is likely to get bigger in the years ahead.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares in Amazon and Shopify. The Motley Fool UK has recommended Amazon, Etsy, and Shopify. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.