Shopify (SHOP -0.47%) has been a dream stock for investors. Its share price has risen by more than 900% over the past three years, as the company has cemented its position as the leading multichannel commerce platform for entrepreneurs across the world.
But is Shopify stock a good investment from this point forward?
Shopify's ascent has been breathtaking. From a relatively meager $24 million in revenues in 2012, the company's top line surged more than 4,400% to $1.1 billion in 2018. During that time, its annual gross merchandise volume (GMV) -- the total amount of sales made by all the merchants on its platform -- rose from $700 million to a staggering $41 billion. Shopify now facilitates approximately 5% of all retail e-commerce sales in the U.S. Only Amazon and eBay account for larger pieces of that pie.
More than 800,000 businesses use Shopify's services to power their operations. For as little as $9 per month, clients get the basic tools to begin selling goods online. For $29 per month, they can build fully functional online stores. Shopify also provides tools such as point-of-sale systems for physical retail stores. Additional service offerings include payment processing, shipping, and working capital loans.
By steadily adding new services, Shopify has increased the value it provides to its customers, and has become a key partner to hundreds of thousands of businesses around the world. Moreover, each additional service it provides those clients increases their switching costs, thereby making them less likely to leave Shopify for one of its competitors.
A massive growth opportunity
Despite years of torrid growth, Shopify still has plenty of room for expansion. The company estimates that small businesses account for an addressable market of $70 billion. For a company that generated slightly more than $1 billion last year, that market segment alone represents an enormous growth opportunity.
Better still, larger businesses are increasingly joining Shopify's client roster. Its Shopify Plus service offers enterprise-grade solutions to help big companies get even bigger. Even some megacap corporations, such as Johnson & Johnson and Procter & Gamble, have come onboard. At a cost of $2,000 or more per month, Plus is a powerful growth driver for Shopify.
Shopify's total market opportunity grew even larger when it recently announced the launch of its new fulfillment network. Shopify will pack its merchants' products and ship them across the U.S. It will also use machine learning to help its customers optimize their inventories and reduce their shipping costs. Perhaps most interestingly, participating merchants will be able to customize their packaging so as to display their brands, rather than Shopify's. That's in contrast to Amazon, which displays its own brand on the packages it ships for its third-party merchants. For these reasons and others, some analysts believe Shopify could rapidly gain market share at the expense of its rivals.
Premium businesses often trade at premium valuations. This is certainly true for Shopify -- it currently trades at more than 30 times sales. But while that's a steep premium for any company, I hesitate to call Shopify overvalued. With its powerful competitive advantages and massive market opportunity, it is likely to be a far larger business a decade from now.
You could try to wait for a pullback before you buy this stock, but it's possible that there may not be one until Shopify is trading at a significantly higher price. A better strategy may be to open a small position in Shopify today, and plan to add to it over time, particularly when its shares happen to be trading at more attractive valuations. In this way, you'll be claiming your share of this elite business, and you'll give yourself more chances to boost that stake at favorable prices in the future.