Shopify's Reinvestment Is Only Just Beginning to Pay Off

Shopify (SHOP 3.31%) has been a big winner in the battle over e-commerce. Up nearly 800% in the last three years, the company has built its success by offering a different kind of digital retailing platform, one that helps put the power back into the hands of small business.

In many ways, Shopify is a walled garden like Amazon.com (AMZN 0.03%) and other tech companies that offer e-commerce solutions. But it doesn't compete as a retailer itself and has the ability to integrate with a business' existing selling strategy. It's a powerful story that is growing more compelling over time, and its heavy investment into new tools is only just starting to yield results.

Another quarter of strong performance

With half of 2019 now in the books, Shopify's momentum continues to impress. Subscription revenue (primarily from new businesses signing up for the Shopify website management ecosystem) decelerated in the second quarter, but merchant solutions maintained a better than 50% growth rate. 

YOY = year over year. Data source: Shopify.

Granted, momentum is slowing down as the company grows larger -- the natural order of things in the world of business. Nevertheless, for a company hauling in well over $1 billion a year in revenue, a full-year 2019 outlook implying total growth of at least 41% isn't too shabby. Plus, the company has a history of beating its own internal guidance and raising its outlook, as it did once again during the second-quarter report.

Either way, those numbers are nothing to balk at as the technologist continues to make inroads into the global retailing industry. 

A premium price tag for a reason

There's no denying that investors expect this digital commerce company to keep going at breakneck speed. Profits are nonexistent as Shopify intentionally reinvests back into the business to foster growth, leaving investors with the price-to-sales ratio to value the stock. That metric puts shares at a whopping 30 times the last year's worth of revenue -- a premium valuation unless Shopify can maintain its torrid pace for at least the next few years.

Image source: Getty Images.

A couple of recent maneuvers make me stop short of calling this one an overpriced stock waiting to flop, though.

First, in May 2019, Shopify acquired a small digital business-to-business (B2B) start-up. All of us are consumers of some sort, and are thus familiar with the interaction that goes on between shopper and retailer. That's the interaction Shopify has been almost solely focused on to date as consumer spending online has been hastened by the ascendance of Amazon.  

The world of B2B is a less familiar one for many, but nonetheless a far larger market. Trillions of dollars worth of goods are exchanged between businesses every year, and the move to a digital-first selling model between them is only just gaining momentum. Thus, while Shopify has gained a strong foothold on the retail side, it hasn't even begun to crack the much larger wholesale part of the equation. 

Second, hot on the heels of the acquisition, Shopify also launched an order fulfillment network to build on its shipping and logistics capabilities. While the warehousing and delivery service could go a long way toward keeping the merchant services segment growing in the double digits, I don't think the proximity of the announcement with the move into B2B is coincidental. Shopify is going all-in on the digital economy, creating another option for businesses to trade with one another that isn't on Amazon's own-branded site.  

In short, Shopify is starting a new round of reinvestment that will likely keep the company out of profitable territory for some time; but the potential return could be massive if the provider of digital-retail tech can successfully navigate the new markets it is attempting to break into. Given the opportunity, Shopify still looks like a buy to me, since it could keep growing by leaps and bounds for years to come.