Is the Shopify business in trouble?

Technology company Shopify (SHOP -2.05%) has generated fantastic growth over the years. In 2018, its top line was just under $1.1 billion, and last year it was over $4.6 billion. But while revenues have soared, so have expenses. And now that the company’s growth is slowing, the focus has turned to keeping costs in check, where Shopify has a lot going for it.

Has the company dug itself too deep a hole, or is it a good contrarian investment to add to your portfolio today?

Shopify’s expenses grew faster than its revenue

There is no doubt that Shopify has achieved impressive results over the years by providing business owners and entrepreneurs with various tools and services to run an ecommerce store. During the early stages of the pandemic, when people were losing their jobs or looking for ways to make some extra cash, Shopify offered a way for its customers to profit from a hobby or business. The pandemic has accelerated its growth, but it has also led to a surge in spending, which has grown at an even faster rate than its main line.

SHOP Revenue Chart (Quarterly).

YCharts data.

There was a brief period where Shopify’s profit margin improved rapidly, but that was tied to increased pandemic shopping when businesses were struggling to meet demand and online businesses thrived. Now that the economy has normalized, the trend has reversed.

Shopify is working to reduce costs, but with a net loss of $158 million in the most recent quarter (for the period ended September 30), its profits are back in the red.

Cash burn is another problem

A more troubling issue for the business may be money consumption. This is what growth investors should care most about, because companies need abundant liquidity to fuel any expansion.

Amidst this recent slowdown, Shopify is struggling to maintain positive cash flow. Last quarter, the company burned $214 million from its day-to-day operations, which is a continuation of a troubling trend:

BUY cash from operations chart (quarterly).

YCharts data.

What’s encouraging, however, is that Shopify had just under $1.4 billion in cash and cash equivalents on its books at the end of September. It also has another $3.6 billion in marketable securities. The company is not in danger of running out of cash unless its burn rate accelerates significantly.

However, what this image tells investors is that Shopify still has a long way to go to improve its operations, as a cash-burning business is one that risk-averse investors are likely to shy away from.

Is Shopify Stock a Buy Today?

Shopify’s business grew at a rate of 22% in the recent quarter, which adds to the 46% growth it achieved a year earlier. These are impressive results given the challenging economic conditions that exist today, and are a positive sign that the company is still doing well.

There is a lot of work for the company to do before its business becomes profitable. It could take years for that to happen, but if Shopify can cut its expenses while still generating positive growth, then this could be a terrific investment to buy right now. With sales of 9.1x, the stock is trading at a much more reasonable multiple than it sold nearly 50x a year ago.

With a lot of money on its books, Shopify is a well-funded company and it’s more secure than it sounds. While it can be a bumpy ride, buying and holding Shopify stock could be an excellent move for long-term investors.

David Jagielski does not hold any positions in any of the stocks mentioned. The Motley Fool has locations and recommends Shopify. The Motley Fool recommends the following options: $1,140 January 2023 long calls on Shopify and $1,160 January 2023 short calls on Shopify. The Motley Fool has a disclosure policy.

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