It hasn't been easy being a growth investor over the past few months. The Federal Reserve has strongly hinted that it intends to raise interest rates to combat the highest inflation the U.S. has seen in the last four decades. And as risk appetite falters, investors have been selling off high-growth stocks in droves, as there is now a growing perception that these businesses' prospects may stall.
However, there are still companies that are poised to continue growing post-pandemic. Many habits and practices have changed as people have found new (and arguably more efficient) ways of communicating and conducting business. Shopify (SHOP -2.37%) is one beneficiary of the growing trend of starting and running home businesses. The company runs a platform that provides tools and resources for aspiring entrepreneurs to start, operate, and run their businesses, especially online.
Here's why this company is my top growth stock to buy right now.
Image source: Getty images.
Shopify is an e-commerce powerhouse
Shopify occupies a unique position within the e-commerce industry, as the company is responsible for powering millions of businesses in more than 175 countries. The pandemic accelerated the shift toward running home businesses as many people lost their jobs or sought better work-life balance. Shopify also enjoys strong tailwinds from an explosion in e-commerce, as digital adoption soars and more people discover the ease of transacting through their laptops and smartphones.
The company's efforts to build out its platform have paid off. It now has a 10.3% share of U.S. retail e-commerce sales for the whole of 2021, and is ranked second behind market leader Amazon (AMZN -1.64%). What's more, Shopify also caters to merchants of all sizes, from small start-up entrepreneurs and small and medium businesses (SMBs) to larger brands. The company estimates that the total addressable market for SMBs stands at around $160 billion, offering ample room for it to continue growing.
Improved financials and operating numbers
Shopify's growth can also be seen in the company's strengthening financial and operating numbers. Revenue has increased more than six-fold from $673.3 million in fiscal 2017 (FY2017) to $4.6 billion in FY2021. Shopify was already steadily growing even before the pandemic in 2020, but it saw its top line grow at much faster rates in the last two years.
Gross merchandise value (GMV) surged from $26.3 billion to $175.4 billion over the same period as more merchants hopped onto Shopify's platform. Monthly recurring revenue, a measure of the number of merchants on the company's platform multiplied by the average monthly subscription plan fee, has grown 41% annually since the end of 2016 from just $18.5 million to $102 million. Gross payment volume (GPV) jumped by 59.2% year over year in FY2021 to $85.8 billion, and made up 49% of the GMV processed, up from 45% in FY2020. The GPV improvement indicates that more customers are transacting with merchants through Shopify's platform, implying higher usage and stronger loyalty.
Shopify keeps adding platform enhancements
Platform enhancements are a mainstay for the company and help its merchants to not only reach more buyers but also tap into myriad ways to reach out to their customers. Last year Shopify introduced TikTok shopping, allowing merchants with a TikTok for Business account which allows them to add items to their Shopify store checkout. The company also rolled out its checkout function Shop Pay to merchants on Meta Platform's social media sites Facebook and Instagram, and integrated Shopify Payments with Buy on Google, creating a seamless process for customers to purchase items on its platform and then check out directly on Alphabet's Google.
And these improvements will continue this year. Shopify plans to think of new ways to connect merchants with their customers through point-of-sale channels and social commerce. The plan is to also help these merchants take their businesses to other countries, thus greatly expanding their customer base. At the same time, Shopify will be simplifying its fulfillment process to allow for quicker and more efficient deliveries. All these enhancements will no doubt endear more merchants to its platform and help the company to attract even more merchants.
A lower valuation
Probably the most compelling reason to buy Shopify's shares now is that its valuation has become more attractive with the crash in its stock price. At the onset of the pandemic two years ago, Shopify was trading at a price-to-sales (P/S) ratio of around 38. When the company released its FY2019 earnings in early February 2020, its share price was hovering at around $531.
Fast forward two years and Shopify is trading at a P/S of around 18.7 times its FY2021 sales. The valuation has declined significantly due to a combination of higher sales and the company's share price coming back down to $686 (from an all-time high of $1,762.90). But investors who scoop up shares will get to own a company that has a more robust revenue base and a strong and growing platform that is popular with an assortment of merchants and is enjoying sustained tailwinds from digitalization.
