Tech giant Shopify (SHOP +2.30%) has been a bit of a market darling since its initial public offering back in 2015. Even after a recent sell-off, the company's shares are up by roughly 2,500% in the past six years. That's an outstanding performance by any metric, but many investors may be worried that it's too late to join this party.
After all, Shopify's most recent financial results failed to impress, and the company is still not consistently profitable. Given current market conditions, Shopify's shares could drop even lower in the near term. More importantly, what does the future hold for Shopify?
Could the company still provide market-shattering returns in the long run and perhaps help turn a comparatively modest sum into $1 million?
What it would take
To answer that question, let's get a bit more specific. If you were to invest $200,000 in Shopify today, what would it take for that initial capital to become $1 million in, say, 10 years, assuming you don't add to your investment in that period? It would take a compound annual growth rate (CAGR) of roughly 17.46%.
Over the past 30 years, the S&P 500 has provided a CAGR of roughly 8.10%. That's adjusted for inflation and includes dividend reinvestment. To turn $200,000 into $1 million in the next 10 years, Shopify would have to provide returns that are more than twice as high as the performance of the S&P 500 over the past 30 years.
Image source: Getty Images.
Shopify's recent financial results weren't all bad
Shopify's fourth-quarter results spooked investors because of slowing growth rates and the company's assertion that its pandemic tailwind seems to be over. During the period, Shopify's revenue grew by about 41% year over year to $1.4 billion. While that would be an excellent performance for most companies, it's not for Shopify. The tech giant's revenue growth rate this time around was on the lower end of what it has historically produced.
SHOP Revenue (YOY = year over year) data by YCharts.
That's a concern, but note that the company's revenue increases soared during the pandemic. As more people turned to e-commerce options, merchants flocked to Shopify's platform to open online storefronts. That had a positive impact on Shopify's business, and the company was always going to face difficult year-over-year comparisons after the fact.
Others may point to the red ink on Shopify's bottom line. During Q4, the company's net loss came in at $371.3 million, compared to the net income of $123.9 million reported during the year-ago period. But it's essential to note that much of this loss had nothing to do with its business activities.
NASDAQ: SHOP
Key Data Points
Shopify incurred a non-cash expense (unrealized loss on equity) of $503.1 million related to its investment in Global-e Online, an e-commerce company whose shares got hammered recently. Shopify's adjusted net income for the quarter, which excludes such non-cash expenses, came in at $172.8 million, still lower than the adjusted net income of $198.8 million reported during Q4 2020 but better than its net loss.
There were some bright spots in the company's earnings report, too. Its gross merchandise volume (GMV, the total value of orders conducted on the company's platform) continues to increase. It clocked in at $54.1 billion for the quarter, 31% higher than Q4 2020. GMV is an important metric for Shopify since it indicates the strength of the businesses that run their operations through its platform.
As the company continues to add new merchants, and as these merchants opt-in to additional services the company offers, GMV will grow. Shopify ended the fiscal year 2021 with 2,063,000 merchants. That represents a year-over-year increase of almost 18%. It's also more than five times the 377,500 merchants it had at the end of the fiscal year 2016.
What the future holds for Shopify
Shopify's business benefits from high switching costs, which give it a potent competitive edge. Since it takes a considerable amount of time and effort to build an attractive online storefront from scratch, merchants are unlikely to close up shop and jump ship to one of the company's competitors. That's especially the case when doing so would likely result in business disruption and the loss of customers.
That's why the bulk of Shopify's clients are likely to stay put. Meanwhile, there remains significant room to grow. In 2021, e-commerce sales accounted for only 13.2% of total sales in the U.S. That number is likely lower elsewhere, which means there is substantial room for Shopify to expand its operations, both in the U.S. and abroad. Shopify is better positioned than most to tap into this opportunity, and although revenue growth has decelerated recently, I expect it to stabilize.
Analysts think the company's revenue will grow by 38.3% annually over the next five years. Valuation is still a concern for the company as it is trading at 14 times forward sales, compared to a forward price-to-sales ratio of just 3.5 for Wix, one of its closest competitors. That's one reason why Shopify may continue to be volatile in the short term. The market is ruthless with richly valued stocks that fall even slightly short of expectations.
But in the long run, Shopify's shareholders who stick with the company through this period will be rewarded. However, can the company record the CAGR of 17.46% it needs in the next 10 years to turn $200,000 into $1 million? In my view, the company has what it takes to pull that off, given the immense opportunity that presents itself in the e-commerce market and the solid moat it has already built.
That's why this stock remains one of my highest-conviction holdings. But even if it doesn't accomplish this goal, Shopify is an excellent tech stock to buy and hold for a long time.
