Shopify is quietly becoming a global e-commerce giant — and more.
The last 12 months have been volatile for Shopify‘s (SHOP 1.09%) investors. At one point, the stock traded at a low of $45.50, but it then doubled in the next few months to reach $91.57. Today, the stock is back down to about $63.
The recent stock movement suggests that the bulls and bears are still undecided on Shopify’s long-term prospects. The former likes the huge e-commerce opportunity ahead, while the latter has concerns over Shopify’s elevated valuation.
So what should current and future investors do with Shopify stock? This article aims to shed some light on that.
Image source: Getty Images.
An alternative partner for merchants
One of the biggest trends in the last two decades is the growth of the e-commerce industry, propelling some of the biggest success stories of our generation. Amazon and Shopify are some examples of the huge beneficiaries of this tailwind.
While both companies seem alike to general consumers, they are entirely different companies with vastly different business models. Amazon operates an e-commerce marketplace, selling products directly and indirectly (via third-party merchants) to consumers. This combination of first- and third-party sales models helps Amazon get the best of both worlds, serving its customers and getting commissions from merchants in exchange for sales on its platform.
The relationship between Amazon and its merchants is love-hate. On the one hand, merchants depend on Amazon’s massive user base and other services like fulfillment and logistics to grow their sales. Yet, they are also at the mercy of the tech giant since Amazon sets the rules of the game, which could go against the interest of its merchants. Worse, Amazon is a direct competitor to these merchants by offering similar products at lower prices — it can do so because of its huge purchasing power and access to information on historical sales.
On the other hand, Shopify is a software-as-a-service (SaaS) company focusing mainly on providing tools to help merchants succeed in the digital world. This means that, unlike Amazon, Shopify allows merchants full ownership over their customer data, brands, websites, and others, giving them control over their business.
Besides, merchants can customize their online stores, websites, and services to their business needs, which helps them better serve their customers. This, again, contrasts significantly with Amazon since merchants have no choice but to accept Amazon’s decision on store design and other services.
Another essential aspect that Shopify brings is to help merchants go omnichannel by providing all the tools to sell online, offline, and everywhere else. For instance, a merchant can begin selling online using the Shopify software platform but later expand in the brick-and-mortar world with the help of Shopify POS, equipped with both hardware and software tools.
In short, Shopify has made itself indispensable by aligning its interests with those of its merchants.
Going global, and everywhere else
Shopify has been a remarkable growth stock. From 2015 to 2023, revenue has increased from $205 million to $7.1 billion . Given its size, some investors have concerns about the tech company’s ability to grow from here.
I think those concerns, while valid, might have missed the big picture. To start, Shopify enabled $236 billion in gross merchandise value (GMV) in 2023, just 3% of the total U.S. retail market spending of $7.3 trillion. It could grow exponentially and still not exhaust the opportunity.
To this end, the company is heavily investing in growing its offline business via its POS hardware and software offerings, with promising early results. For example, offline revenue reached $411 million in 2023, five times that of 2019 . As long as it can continue to innovate and add tools to help customers become successful in selling offline, it will have plenty of opportunities to grow with existing merchants (those expanding from online to omnichannel) and attract new merchants traditionally from the offline world.
But that’s not all. Shopify aims to become a global e-commerce player, further expanding its target addressable market. This includes taking its best-in-class tools offered to merchants in existing markets, such as payments, POS, and financing, into newer markets to help overseas merchants become successful. Beyond that, it also allows existing customers to go global via Shopify markets — a set of tools to help merchants sell internationally. To put it into perspective, global e-commerce sales reached $5.8 trillion in 2023, not including offline retail.
In short, Shopify has enough opportunities to keep it busy for the next decade.
A solid business but at a premium price tag
Identifying a solid company with good prospects is just half of the equation for a sound investment. Investors should also consider the price they pay for the stock. On that score, Shopify trades at a price-to-sales (PS) ratio of 11.2, a considerable premium to Amazon’s P/S ratio of 3.
While it’s not unreasonable for investors to pay a higher price tag for Shopify, paying such a huge multiple doesn’t seem safe, given its vast prospects.
What it all means for investors
Shopify has delivered a remarkable track record of growth since going public. Better still, the company is well-positioned to keep growing in the coming years as it exploits the opportunities locally and in overseas markets.
However, the positive factors have been reflected in its premium valuation, so investors are not getting any bargains when buying the stock today. Overall, while the stock is probably not a good buy today, given the opportunity ahead, it is not a sell for those who already own it. It’s a hold for now.