If you're following online retail or just keeping up with the stock market at large, there's a good chance you've been hearing a lot about Shopify (NYSE:SHOP) lately. The e-commerce services provider is one of the best-performing large-cap stocks this year, and it recently hit a fresh all-time high after delivering another stellar earnings report.
Let's take a further look into this buzz-worthy company.
The Toronto-based company provides retail website creation tools, payment processing, and a wide range of other support services to help businesses grow online. It shouldn't come as much of a surprise that these kinds of services are in high demand amid conditions created by the coronavirus, but Shopify is expanding even faster than expected -- and the company is still finding ways to surprise investors and analysts.
The company's performance has been stellar
Shopify's valuation has seen meteoric growth since its initial public offering in 2015. The company's sales growth has regularly surpassed expectations, and the second-quarter results that it posted on July 29 are perhaps its most impressive since going public.
Shopify's second-quarter sales skyrocketed 97% year over year, spurred on by new merchant partner additions and a 119% increase in gross merchandise volume for stores on its platform. Revenue of $714.3 million crushed the average analyst estimate for sales of roughly $500 million. While the coronavirus disrupted conventional brick-and-mortar retail operations, Shopify benefited from offering the right services at the right time.
Second-quarter sales growth has never come in higher since the company went public, with the closest being the 93% year-over-year revenue growth that Shopify posted in Q2 2016. Monthly recurring revenue in the quarter has now grown at a 46% compound annual growth rate over the last five years. Shopify has never looked stronger.
And its valuation is eye-popping
Shopify is currently valued at roughly $125 billion and trades at a whopping 47.5 times this year's expected sales -- a multiple that reflects expectations that the company will post tremendous growth over the long term. That will require high-level execution on the part of the business, but Shopify could be able to live up to and exceed the projections that have helped its valuation hit new highs.
The stock has soared more than 160% this year alone, and the e-commerce specialist's rapid rise to become one of the world's most valuable online retail companies has attracted lots of attention. Shopify's valuation is hotly debated today and has been for much of the company's relatively short time on the market, but thus far, it's been an awful stock to bet against. Shares are up more than 2,900% over the last five years.
The retail world is changing rapidly, and Shopify is thriving as it helps businesses of all sizes quickly adapt and take advantage of huge tailwinds for e-commerce. The company's valuation looks pretty lofty in terms of sales, and profits are admittedly still small right now as management prioritizes building tech infrastructure and landing new merchant partners.
Focusing on growth looks like the right move for now, and Shopify has the potential to be very profitable at some point. Its Q2 non-GAAP (adjusted) operating income rose more than tenfold to reach $129.4 million. Gross profit of $381.4 million in the quarter was just $3.2 million short of the total gross profit that the company generated in all of 2017, and it should be able to reduce expenses as a percentage of sales over the long term and take advantage of overall growth for the e-commerce market.
CBRE estimates that e-commerce's share of the total U.S. retail market will have climbed from 10% in 2018 to 15.1% in 2022. That suggests a favorable operating backdrop for online stores and e-commerce services providers in the near future. It also leaves plenty of room for businesses in those categories to expand past the end of that period, as the total retail spending pool increases and online retail continues to account for a bigger share.
As impressive as Shopify's performance has been, there's still a long runway for growth in the e-commerce industry. Whether the company can continue crushing expectations remains to be seen, but it's guaranteed to be a stock that has people talking for years to come.