PayPal (PYPL 0.64%) crushed the payments segment after it reported fourth-quarter earnings that suggested a big slowdown was in the cards for the industry.
Although the report itself wasn't all that bad -- actually, it was pretty good -- it was PayPal's guidance that spooked the market. New active users were expected to dramatically fall to just 15 million to 20 million, or a third of what it reported last year, and was less than half of the 56 million Wall Street had been anticipating.
Coupled with the fact PayPal was abandoning its goal of attracting 750 million new members to its platform by 2025 and would focus instead on extracting more revenue from its existing members, the implication was that there was little growth coming in the industry's future.
Image source: Getty Images.
Stocks all across the payment sector tumbled as a result. The market was already rotating away from high-flying tech stocks into more consumer stable names, and this news only seemed to confirm the decision.
Yet the reaction seems overblown as PayPal may have just been too aggressive in setting its targets, and though factors like government stimulus checks seeding a consumer shopping frenzy likely won't be repeated, there's reason to believe the payments business has lots of growth ahead of it.
In particular, even though Shopify (SHOP -2.37%) has been battered, it still looks like it should remain a giant in the fintech space, even if an industry slowdown does materialize.
Why Shopify can still win
Although Shopify stock is down 41% since the November tech stock rout began, it's not the worst performer in the payments sector. Almost everyone else has done worse.
Shopify has become an e-commerce titan, coming in second only to Amazon.com for the greatest share of online retail sales. The spread between those two is large, naturally (Amazon has a 39% share, Shopify, 8.6%), but Shopify has benefited from the continued transition by business to an online presence, a trend that's accelerating.
According to the U.S. Census Bureau, more than 4.4 million new businesses were created in 2020, the greatest number of business launches ever and 51% more than the average number of launches between 2010 and 2019.
While 2021 didn't reach those heights, it was far, far above the average of the preceding decade.
Chart source: U.S. Census Bureau.
Considering the number of people who quit their job during the pandemic, what has come to be known as the Great Resignation, this metric is not likely to diminish all that much in the years ahead.
The hypergrowth trajectory Shopify was on before the pandemic was not disrupted by crisis, and it's not about to stop now.
Growing bigger with bigger clients
It took Shopify's merchants 15 years to achieve $200 billion in cumulative gross merchandise value (GMV), but just 16 months to double that to $400 billion, as of the end of the third quarter.
That's because Shopify is no longer just about helping small and medium-sized businesses establish their online presence; now it is helping bigger enterprises, too. General Mills, Heinken, Kraft Heinz, Logitech, and Molson Coors are just some of the multinational corporations availing themselves of Shopify's services.
Image source: Getty Images.
FTI Consulting estimates that online retail market share as a percentage of total retail sales in the U.S. will grow from 18% in 2020 to 33% by 2030, and will surpass the $1 trillion mark by 2023. It's expected to hit almost $2 trillion by 2030.
An inexorable force driving the sector higher
Revenue for Shopify hit $1.1 billion in the third quarter, a 46% increase from the year-ago period, while GMV jumped 35% to $42 billion. And Wall Street forecasts revenue will reach $16 billion by the middle of the decade, a 500% increase.
With a consensus one-year price target of almost $1,600, the stock has better than 70% upside and is but one reason Shopify will eventually be a trillion-dollar company.
But it also means PayPal's rumored collapse isn't universal to the payments sector, and certainly not to Shopify.
