3 Reasons to Buy and Hold This E-Commerce Stock

Shopify (SHOP -2.04%) has been an incredible investment. The stock is up more than 800% over the last three years, substantially outperforming the broader market. Those big returns are the result of several factors, ranging from the company's great culture to the increasing popularity of online shopping.

Importantly, all of the things that make Shopify great are just as relevant today as they were three years ago, if not more so. That's why, even after those massive gains, Shopify still looks like a good long-term investment. Here are three reasons to buy and hold this e-commerce stock.

1. Shopify has a big market opportunity

Shopify makes it possible for anyone to become an entrepreneur. Its platform allows merchants to start selling online for as little as $9 per month. And for those willing to spend a little more, Shopify offers solutions for inventory management, payment processing, shipping and fulfillment, and marketing and analytics, and the ability to manage multiple storefronts from a single backend.

Image source: Getty Images

The world tends to embrace solutions that improve productivity or reduce complexity, and e-commerce is no exception. Online shopping is much faster and easier than traditional retail, which means consumers are left with more time for other activities.

In total, Shopify estimates its addressable market among small- and medium-sized businesses at $153 billion. Notably, that figure doesn't include larger merchants subscribing to its Shopify Plus plan. That means this tech company still has a massive market opportunity ahead.

2. Shopify makes commerce better

Shopify's mission is to make commerce better for everyone. That includes consumers, but it also applies to its merchants and employees.

Of course, Shopify helps its merchants by supporting their entrepreneurial ambitions. But that's not unique. What really separates Shopify is its merchant-first approach. Rather than pulling all sellers onto one platform like Amazon, Shopify helps its merchants differentiate their brands by powering personalized storefronts. And the company continues to support its merchants in new ways.

For example, Shopify launched a new point-of-sale (POS) app last year, making it easier for sellers to manage both physical and digital storefronts. What's more, the company offered its POS system free of charge for six months during the pandemic, giving sellers a chance to try the product without risk.

According to Shopify, merchants taking an omnichannel approach (i.e. selling both online and in-store) saw revenue jump 30% year-over-year as of May 2020. That big jump was partially driven by two other features in the new app: in-store or curbside pickup, and local delivery. These offerings helped merchants adapt to the "new normal" and better serve their buyers, increasing the likelihood of lasting customer relationships.

Just as important, Shopify has earned a reputation as a great place to work. It was recognized as one of Canada's top 100 employers in 2021. And according to Glassdoor, 84% of employees would recommend Shopify to a friend, and 92% approve of CEO Tobias Lütke.

As an example, the company has permanently transitioned to a remote work model, giving its staff the freedom to work from anywhere. To help fund this transition, Shopify gave each employee a $1,000 stipend for home office supplies.

This point may seem trivial, but companies with a great culture have an advantage in terms of attracting and retaining talent. Personally, I'd rather invest in a company with happy workers than one that prioritizes profits above the wellbeing of its employees.

3. Shopify is growing quickly

Last year, the pandemic pulled e-commerce forward by 10 years, according to Shopify. That tailwind, combined with the increased adoption of merchant solutions like payment processing, financing, and shipping, helped drive revenue growth of 86%.

Also noteworthy, Shopify's net income hit $320 million last year, representing a 10.9% profit margin. That's the first time the company has achieved GAAP profitability on a full-year basis.

However, investors should always consider financial performance over a longer period, too. Over the last three years, despite a 4% decline in gross margin, driven by a shift in revenue mix toward lower-margin merchant solutions, Shopify's business has grown quickly.

Data source: Shopify SEC filings. CAGR = compound annual growth rate.

At the end of 2020, Shopify had $6.4 billion in cash, equivalents, and marketable securities on its balance sheet. That figure significantly dwarfs the company's $758 million in long-term debt. It also puts Shopify in a position to aggressively fund future growth initiatives like international expansion and the continued buildout of its fulfillment network.

A final word

Shopify currently trades at an outrageous 467 times earnings and 50 times sales. Investors should be aware that valuation multiples of that size typically come with volatility. The slightest bit of bad news could send the share price tumbling.

However, growth stocks often trade at pricey valuations. Rather than let that dissuade you, consider starting with a small position (or adding a few shares to an existing position). Shopify has an enormous market opportunity, a strong business model, and a history of impressive financial performance. I believe that combination will carry this e-commerce company to even greater success in the coming years. That's why I am (and plan to remain) a shareholder.