Oith the Nasdaq Composite approaching bear market territory again – down 20% from its peak – investors are looking for bargains among the rubble. Many of the most popular stocks have been halved or more over the past six months. Some will never recover.

Shopify (NYSE: SHOP) — a platform that allows merchants to run their entire e-commerce business from a single app — is a stock-shot company that looks like it has years of growth in mind. But some metrics point to trouble ahead. Here are some charts to look at before taking action.

Image source: Getty Images.

Stocks have been clubbed

Long-term shareholders should be very happy with Shopify. The stock has returned 500% over the past five years. It’s fantastic. Yet those yields had eclipsed 2,100% before the recent downturn. Shares are currently 73% below the peak.

SHOP Chart

STORE given by Y-Charts

Partner referral continues to slow

Shopify has always grown rapidly. Revenue increased by almost 50% in 2019. It accelerated to 85% in 2020 thanks to the pandemic. The need for traditional brands to go online, as well as increased online sales overall, fueled the expansion.

One of the most important levers to expand its customer base was its partner referral program. As 2020 approached, the number of existing customers – partners – who referred a new customer was steadily increasing every quarter. In 2020, it climbed. It’s done a 180 degree turn. It declined sequentially – quarter over quarter – for the second half of last year.

Chart showing the quarter-over-quarter decline in the number of referring partners.

Data source: Shopify. Table by author. QoQ = Quarter on Quarter.

It’s not just a sequential decline. For the first time, the number of partners referring at least one merchant decreased year-over-year in the fourth quarter of 2021, from 43,000 to 40,000. It had increased between 35% and 70% each quarter of April 2019 to June 2021. These referrals were a source of sales that didn’t require a lot of marketing. And that boosted profits.

Declining profits even with higher revenues

One of the characteristics that investors appreciate in online businesses is the ease with which they scale. Once the initial investments are covered, each additional customer is almost entirely a profit. After demonstrating this quality for years, history is cracking at Shopify. Profits and sales diverge. Even after management adjustments, trailing 12-month operating profit declined in the fourth quarter.

This is still huge compared to the previous year. But like many fast-growing companies, it’s too late to see what’s happening in the business right now.

Chart illustrating the decline in 12-month operating profit over the last quarter.

Data source: Shopify. Table by author. TTM = last 12 months.

The reason Wall Street rewards a fast-growing company is on the assumption that it can turn on the profit tap whenever it wants. All bets are off when the profits start to reverse.

All is not lost

In the fourth quarter of 2021, online sales accounted for only 13% of all retail sales in the United States. This leaves plenty of room for Shopify, as well as companies like Amazon and Etsy, to grow. The business is still growing, it’s profitable, and it has myriad ways to capture more of its customers’ spending.

That said, the rush of online businesses may have artificially inflated the size and speed of Shopify’s partner network. Until the partner’s reference number stops dropping, it’s hard to tell what the business is worth. Don’t be surprised if Wall Street shows much slower growth once this low is reached. It took nearly a decade for Amazon shares to reach a new high after the dotcom bubble burst. Don’t be surprised if Shopify takes longer – even if the business is doing well.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Jason Hawthorne has no position in the stocks mentioned. The Motley Fool owns and recommends Amazon, Etsy and Shopify. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short 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.