Why Shopify Is Still a Great Growth Stock

Shopify (SHOP 1.42%) simplifies e-commerce. The company's platform makes it easy for merchants to build digital storefronts and manage everything from payment processing and inventory management to fulfillment and shipping solutions. Its suite of software tools is an incredible asset for businesses large and small, enabling them to participate in the digital economy.

Not surprisingly, the strong growth of e-commerce over the past few years has resulted in incredible gains for Shopify shareholders. Its share price has rocketed up by more than 950% in just three years. But if you haven't added it to your portfolio yet, it's not too late to do so profitably.

Here are four reasons why Shopify is still a great growth stock.

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1. E-commerce is a massive opportunity

All around the world, a digital transformation is underway, and e-commerce is a big part of that shift. In fact, according to eMarketer, global e-commerce sales jumped by more than 27% in 2020, and while the growth rate may slow down a bit in the near term, the trend is far from petering out.

Shopify continues to innovate and launch new products to help its clients capitalize on this opportunity. For instance, during the past year, it expanded its retail channels to include integrations with Pinterest, Walmart, and Facebook Shops, allowing its merchants to easily list inventory on these sites. Investors should note that Walmart, the largest retailer in the world, chose to work with Shopify, not against it.

In total, management estimates Shopify's market opportunity will reach $78 billion by 2023, more than 30 times the company's trailing-12-month sales. In other words, the company has plenty of room to grow.

2. Shopify's growth is accelerating

During the pandemic, tens of millions of Americans have been making an effort to keep their distance from others, and that often means avoiding in-person shopping. As a result, they've been turning even more often to e-commerce options to buy what they need, and Shopify has been there to help. Its already-strong growth accelerated in the first nine months of 2020, and it reached profitability on a trailing-12-month basis for the first time.

Source: Shopify  SEC filings. GMV = gross merchandise volume. YOY = year over year.

More importantly, according to research published by Gartner in August, Shopify was taking market share faster than any other rival, including competitors like Adobe, Salesforce, and BigCommerce. 

3. It supports its merchants

Shopify is designed from the ground up to support its merchants. But rivals like Amazon bring all sellers onto one platform, making it hard for any business to stand out from the crowd. And of course, Amazon competes directly against the third-party sellers listing their products on its marketplace. Moreover, it only allows anonymized communication between buyers and sellers, which prevents merchants from developing relationships with their customers.

By contrast, Shopify helps entrepreneurs design personalized online stores, build their own brands, and develop strong customer relationships. All of those things can be powerful factors in helping a business succeed. That's not to say Amazon is a bad business -- nothing could be further from the truth. But Shopify's model is better aligned with the interests of its clients.

4. It has a powerful partner ecosystem

Shopify's thriving partner ecosystem allows web designers and app developers to build products that integrate with its platform, increasing its utility and adding value for merchants. As of the most recent quarter, 5,300 apps were available through the Shopify App Store, providing solutions for everything from store design and security to finance and analytics. What's more, 37,400 partners actually referred at least one client to Shopify in the last year.

Likewise, the most recent version of the Shopify API (application programming interface) allows developers to integrate subscription purchases into Shopify's checkout. Prior to this, merchants had to choose between using Shopify's checkout or selling subscriptions, which meant managing multiple checkout solutions.

This new feature greatly simplifies the process, allowing merchants to offer subscription sales to clients without the previous complexity. Moreover, Shopify's focus on continuously improving its platform underscores its "merchants first" business model. This advantage should help it keep gaining market share in the years ahead.

A word on valuation

Analysts have been calling Shopify overvalued for years. The short-focused commentators at Citron Research published a condemning report in October 2017, describing the company as an "illegal get-rich-quick" scheme. Citron gave Shopify -- which was trading above $100 a share at the time -- a price target of $60. Not surprisingly, investors panicked and the share price dropped nearly 20%. But over the next few months, the price rebounded and hit new highs.

So Citron Research came back in April 2019, again calling the stock overvalued and predicting the share price would drop back to $100 within 12 months. Wrong again. Today, Shopify trades at more than 10 times that price. And 10 years from now, who knows -- Shopify could have a market cap five times as large as the one it sports today.

I'm not saying Shopify looks cheap. Make no mistake, this stock trades at incredibly frothy valuations -- 63 times sales and 820 times earnings. But one of the most difficult things I've had to learn as an investor is that it's OK in some instances to buy stocks that Wall Street says are overvalued. If you're worried about valuation, buy in small slices. And try to buy at better valuations each time.

Some of my most rewarding investments have been stocks that were "overvalued" when I bought them, including Shopify. In my opinion, valuation is important -- but it's much more important to find high-quality companies that offer solid products and have growing market opportunities. Those types of stocks tend to be long-term winners. And Shopify checks all of those boxes.