Not too long ago, Shopify Inc. (SHOP, Financial) was one of the hottest investments on the market. In 2015, the stock bottomed out at around $2 per share. Five years later, they zoomed past $150. After a year or so at nosebleed levels, shares have come down to earth, recently falling below the $50.
Is this a chance to gain exposure to a rapid-growth stock at a rarely discounted price?
Why I love Shopify
Tech investors talk about “platform stocks” quite a bit, but few companies are truly worthy of the accolade. On paper, platform stocks are businesses that become foundational to a bunch of other businesses. For its customers to function properly, they need the services of the platform. If the platform ceased to exist, customers would experience huge levels of friction. That is why platform stocks have “sticky” revenue streams, meaning customers find it difficult to switch to a competitor, but also high profit margins and sustained growth, given the more that is built on top of the platform, the stronger and more compelling it gets.
Shopify is a perfect example of how this works in the real world. The chart below, created by Ben Thompson of Stratechery, illustrates the company's industry power. You can essentially swap “Platform” for “Shopify”. The company's platform includes everything a business needs to begin selling online fast: an online storefront, inventory management, sales analytics, payment processing, shipping and fulfillment, advertising, marketing tools, etc. Businesses both small and large can essentially develop their entire web presence around Shopify, with their customers not even aware of what is powering the entire experience, thus funneling a percentage of sales to Shopify from literally hundreds of thousands of digital storefronts on a daily basis.
Shopify's strategy has, in a way, made it Amazon.com Inc.'s (AMZN, Financial) most fierce competitor, even though it carries no inventory and sells nothing but its software services. While companies like Walmart Inc. (WMT, Financial) attempted to compete with Amazon by replicating its business model, Shopify decided to turn the model on its head by empowering other people to compete with Amazon. In this way, it is responsible for fueling billions in online sales while never needing to take the competitive risk itself.
This, at the end of the day, is my favorite aspect of Shopify: it is a true platform stock. And as we will see, while that designation is appreciated by the market, with shares garnering a premium multiple, the underlying growth track record and prospects still strongly favor an investment for patient investors, especially after the recent pullback.
Shopify stock is still expensive
Make no mistake about it, Shopify shares are no obvious bargain, even after a 75% plunge from their all-time highs. The stock still trades at around 9.7 times sales with a forward price-earnings ratio of around 60, though the company has long struggled to consistently produce positive net income, choosing instead to reinvest heavily to grow the top line. With minimal debt, the enterprise value/revenue ratio is around 9, but it is difficult to make this stock look cheap on a multiple basis. Wix.com Ltd. (WIX, Financial), another former high-growth market darling, for example, trades at just 3.2 times sales. No matter how you look at it, Shopify stock is still very pricey.
But what are you getting for that pricey multiple? One of the best businesses in tech, with strong long-term prospects that should generate high growth rates for years, even decades to come. Let's look more closely at the numbers.
Revenue is still growing quickly
While it is clear from the chart above that Shopify's share price is strongly influenced by its valuation, the underlying fundamentals remain remarkably strong. The company has never seen revenue fall on a trailing 12-month basis and last quarter, sales grew by 31% year over year. While the multiple the market has placed on Shopify has gyrated wildly, the actual sales growth and stability are quite the opposite.
The company is arguably in its best position ever to continue this reliable growth. In the past, Shopify mainly acted as a way for people and businesses to market and sell their goods online with ease. With a few clicks, users could create a website, list items for sale, process payments and track analytics. That was innovative in 2006, but today, Shopify has upped the ante with its suite of tools that would be very difficult for a competitor to replicate. The data speaks for itself.
The company's checkout flow leads the industry in conversion rates. Research by a leading global management consultancy recently confirmed Shopify's 36% overall conversion rate is the best of any software competitor, converting sales at a 15% higher clip than the industry average. For resellers, that means more profit, perhaps the best way to convince more users to leverage your software suite.
These structural competitive advantages are keeping growth rates elevated despite the share price pullback. This quarter, analysts expect revenue to grow by around 22%. Next year, that growth rate is expected to remain high at around 20%. And do not expect those numbers to dip heavily over the next five years and beyond, for the company is now pursuing a global growth strategy that may surprise the market in its long-term impact.
Global growth will hold this stock up
While Shopify shares will continue to move wildly — as rapid-growth stocks frequently do — patient investors can expect to be rewarded given the company's intent to focus on global growth, an opportunity that could easily double or triple revenue. Last quarter, only 15% of the company's merchant sales were generated cross-border. Yet new investments in Shopify Markets and Shopify Markets Pro will allow new and existing merchants to tap 150-plus global markets more easily than ever.
Moving toward a global sales base will hitch Shopify's revenue to a rising tide. DataReportal's latest Global Overview Report estimates that the number of people shopping online worldwide grew by 8.3% in 2022, surpassing 4 billion individuals. Nearly 60% spent on these online purchases was attributed to mobile devices, a segment of the market that Shopify has invested many resources in. All of this should help international e-commerce sales grow from just under $6 billion today to over $8 by 2027.
Be patient with this stock
So Shopify stock is still expensive, but it is building a large-moat business with strong, multiyear growth tailwinds. It is a true platform stock. No metric tells that story better than its recurring revenue. Monthly recurring revenue, or MRR, is calculated by multiplying the number of merchants by the average monthly subscription plan fee. It is a quick way to determine whether the company is building a product that users continually want to use. Last quarter, MRR reached $139 million, up by 30% year over year.
As the valuation multiple proves, shares will remain volatile, largely moving up or down based on market sentiment. But if you are willing to sit through these gyrations and wait for the current multiple (a multiyear low) to grow into the underlying fundamentals, Shopify looks like an ideal buy-and-hold investment for risk-tolerant investors. Platform stocks like this have a tendency to grow for far longer, and far larger, than the market appreciates. If you need any proof, just pull up a long-term chart of Amazon stock. Yes, shares have been pricey for over a decade, but patient shareholders have been more than rewarded. Shopify shares hold the same promise.
