Shopify (SHOP -2.37%) has generated massive returns since its public debut in May 2015. A $10,000 investment in the Canadian e-commerce services company's IPO would be worth more than $820,000 today.
Shopify was also a great stock to hold during the pandemic. It rallied 185% in 2020 as more merchants set up online stores throughout the crisis. The stock price advanced another 29% in 2021 even as the skeptics fretted over its post-pandemic slowdown and its bubbly valuations.
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Investors who don't already own Shopify might be kicking themselves for missing out on those gains. They're also probably wondering if it's too late to invest in this disruptive darling of the e-commerce sector. Let's examine Shopify's growth rates, future plans, and valuations to decide.
Why did Shopify grow like a weed?
Shopify's self-serve e-commerce services enable smaller businesses to quickly set up online stores, process payments, fulfill orders, and manage their online marketing campaigns. Those tools make it a "one-stop shop" for building an independent online business without joining a crowded third-party marketplace like Amazon (AMZN -1.65%).
Many merchants that didn't want to abide by Amazon's rules, pay its fees, or compete with other third-party sellers turned to Shopify to establish an online presence. At the time of its IPO, Shopify only served 162,261 businesses globally. Today, it serves more than 1.7 million businesses.
That's why Shopify's revenue rose at a compound annual growth rate (CAGR) of 70.2% between 2015 and 2020. During those five years, Amazon's revenue increased at a CAGR of 29.3%.
But can Shopify maintain that momentum?
Shopify's revenue rose 86% in 2020 and grew 66% year over year in the first nine months of 2021. Analysts expect its revenue to increase 56% for the full year, and potentially rise 33% in 2022.
Shopify splits its business into two main segments: subscriptions (30% of its revenue last quarter), which includes its point-of-sale services and Shopify Plus plans for larger businesses; and merchant solutions (70% of its revenue), which includes its payment processing, fulfillment, and financing services.
Shopify's growth is decelerating, but the expansion of its stickier subscription business should offset the tough year-over-year comparisons for its merchant solutions business, which experienced unusually strong gross merchandise volume (GMV) growth during the pandemic.
Last quarter, Shopify President Harley Finkelstein said it had taken merchants using Shopify 15 years to generate $200 billion in annual cumulative GMV, but that figure had doubled to $400 billion annually over the past 16 months. Shopify doesn't expect that pandemic-induced acceleration to continue in 2022.
Shopify's adjusted gross margin contracted in 2020 as it generated a higher mix of its revenue from its lower-margin merchant solutions business during the pandemic. But in the first nine months of 2021, its adjusted gross margin rose again as its higher-margin subscription business expanded and locked in more merchants.
Meanwhile, Shopify's robust revenue growth easily offset the temporary fluctuations in its gross margins. Its adjusted net income skyrocketed over 14 times in 2020 and more than doubled year over year in the first nine months of 2021. Analysts expect its adjusted earnings per share (EPS) to rise about 90% for the full year, but dip 4% next year as it ramps up its investments again.
What about Shopify's valuations?
Shopify's business model is disruptive and its growth rates are stellar. However, its stock also trades at nearly 280 times forward earnings and 28 times next year's sales. Those high valuations could limit its near- to mid-term growth potential, while exposing it to inflation-driven sell-offs.
That said, I've repeatedly let my concerns about Shopify's valuations deter me from buying the stock, and I've missed out on some massive gains. Therefore, I think it's time to change how I think about Shopify.
If Shopify grows its revenue at a CAGR of 30% for the rest of the decade, its annual revenue would still rise from $2.9 billion in 2020 to more than $40 billion in 2030. Even if its valuations cool off along the way, Shopify could still easily generate more multibagger gains -- so it certainly isn't too late for long-term investors to accumulate more shares of this hot e-commerce stock.
