The COVID-19 pandemic is accelerating some trends that existed before the start of the outbreak, including the pivot away from brick-and-mortar sales activity to e-commerce. That behavior change has put Shopify (SHOP -8.45%) in an opportune position to help the many companies who are feeling a more urgent need to move at least some of their operations online in order to stay in business.
Shopify helps businesses by offering software tools to start, grow, and market a retail enterprise of any size. Merchants can use its software to run their business across all sales channels, including web, mobile, social media, and physical marketplaces.
Speaking during a second-quarter earnings conference call about how COVID-19 affected his company, Shopify Chief Operating Officer Harley Finkelstein noted, "It has catalyzed e-commerce, introducing major changes in buyer behavior and pulling forward what retail would look like in 2030 into 2020."
Let's take a closer look at this company and try to determine if Shopify stock is a buy right now.
Shopify is generating remarkable growth in revenue
Shopify is benefiting from various state mandates over the spring and summer that have forced nonessential brick-and-mortar businesses to keep customers from shopping in their stores. The top line shows Shopify is growing rapidly. In its most recent quarter, revenue grew 97% year over year. Moreover, it generated more revenue just in its second quarter ($714 million) than it did in all of 2017 ($673 million). Admittedly, that remarkable growth rate may not be sustainable. But a contraction is unlikely as a merchant who creates a digital channel is probably going to maintain it even after the pandemic has run its course.
Importantly, the increase in revenue was significant enough to bring the company into positive net income territory. In its second quarter, Shopify's net income grew to $29 million from a loss of $36 million in the prior year. Further, because of the urgency of the service it provides, Shopify is likely to grow rapidly without having to spend as much on marketing so long as the pandemic keeps people from venturing out of their homes. Companies right now are desperately seeking out its services.
The rapid growth is also creating an advantage of scale as evidenced by the company's adjusted operating expenses as a percentage of revenue, which totaled 56% in its fiscal second quarter of 2019, but decreased to 37% in the second quarter of 2020.
Taking on Amazon
Shopify services are currently provided to about 5.9% of the U.S. retail e-commerce market, far behind Amazon's 37.2% share. Still, it has the second-largest market share, slightly ahead of eBay. The total dollar value of orders facilitated on the Shopify platform has been growing at a compounded annual rate of 67% since 2015. In its Q2 2020 quarter, that figure surged to 120%. If it continues growing at that rate, then its share of the market will soon approach that of Amazon.
Amazon, which offers services similar to Shopify's, is finding its own e-commerce efforts increasingly competing with the third-party sellers that contract to use its site. Many of these merchants continue to deal with Amazon because they feel that they have no alternative. But Shopify gives sellers a different way to connect to online customers without fearing that Shopify will steal their lunch the way that Amazon potentially can.
What this means for investors
Shopify has definitely benefitted from an accelerating revenue stream related to the economic fallout created by the novel coronavirus. The services it provides have become essential to many businesses. With an end to the novel coronavirus crisis nowhere in sight, the need for Shopify's services will remain high.
In addition to the growth of e-commerce, an increase in self-employment and all its required services is also generating a tailwind for Shopify. And with the record amount of people displaced from their jobs because of COVID-19, millions more may turn to self-employment. Indeed, many of the jobs lost during the pandemic will likely be gone forever. And with secular tailwinds behind it, revenue growth is likely to remain robust long after the pandemic has run its course.
Still, the market seems to be aware of the company's bright future and the stock price has rocketed upwards from $417 at the end of March to about $972 as of Aug. 11. In a matter of months, the company went from trading at a price-to-sales ratio of 27 all the way up to 57. The future may be bright for Shopify, but that brightness comes with a high price tag. It might be prudent to wait for a potential pullback in the share price to start accumulating a position in this e-commerce facilitator's stock.