Some investors have gotten nervous about Shopify (SHOP 0.23%) in recent months. Shares of the e-commerce and payments platform are down 50% so far in 2022 after management said growth would be slower than in 2021. This announcement came in conjunction with the macroeconomic worries about interest rate hikes and the fallout from the war in Ukraine, which likely exacerbated the sell-off in Shopify shares.
If you have a long-term time horizon, sell-offs like these can provide buying opportunities. Here are three reasons to buy Shopify stock, and one reason to sell.
Image source: Getty Images.
1. Shopify has an impressive track record of growth
Shopify's annual revenue has grown at a rapid pace since it went public in the middle of the last decade. Since the IPO in 2015, trailing-12-month revenue is up over 4,000%, greatly outpacing technology giants like Alphabet over the same time frame.
How has Shopify been able to grow so quickly? By riding the trend of direct-to-consumer (DTC) online sellers around the world. Shopify's business model is to offer subscriptions for businesses and individuals to easily create a website and start selling things online. It also has an application marketplace, where other businesses can offer services to its e-commerce merchants, and it has its own payments service called Shopify Payments.
As of this writing, it is estimated that Shopify has 1.75 million merchants on its platform, from large enterprises to small individual sellers. From these merchants, Shopify earned $1.3 billion in subscription revenue and $3.3 billion in merchant solutions (the majority of which is payments) in 2021. Merchant solutions have been the big driver of growth over the past few years, with revenue up 442% since 2018. Clearly, merchants are finding value with the Shopify platform.
2. Shopify has a large market opportunity around the world
In 2021, Shopify processed $175.4 billion in gross merchandise volume (GMV), which is the total amount of money that flowed through its platform. Of that, $85.8 billion was gross payment volume (GPV), which means sales that were processed with Shopify Payments.
Understanding GMV and GPV is important because these metrics show Shopify's market share of e-commerce sales around the globe. In 2021, global e-commerce sales were estimated to be $4.9 trillion. Comparing that number to Shopify's annual GMV, the platform has approximately 3.6% market share when looking at the entire globe. Excluding China (Shopify doesn't operate in the country), which did approximately 50% of e-commerce sales in 2021, Shopify has a 7.2% market share of e-commerce sales.
Shopify has grown its market share in e-commerce by growing its GMV faster than the overall industry, which investors should expect to continue over the next few years. But even if Shopify just maintains its 7.2% market share in its addressable markets, the business will likely grow along with the overall industry, as it is expected to hit over $7 trillion in annual spending in 2025.
3. Shopify has minimal direct competition
Shopify has a lot of competition from online marketplaces like Amazon, MercadoLibre, eBay, and Sea Limited. However, there are only a few other large competitors that have copied Shopify's model of being the back-end software that powers other DTC e-commerce websites. These include website builders like BigCommerce, Wix, and Squarespace, which all have decent e-commerce tools. Shopify is still the clear leader though, growing revenue at a faster rate than all three of these competitors.
Identifying the competitive landscape is important. The fact that Shopify is the runaway leader in its e-commerce niche indicates to me the platform will win the majority of new merchants who want to sell directly to consumers online. This will not only lead to increased subscription revenue but also payments revenue over the next few years and beyond.
One reason to sell
You're probably realizing by now that Shopify is a high-quality business. So what could hold back the stock from performing well for investors? One word: valuation.
As of this writing, Shopify's stock has a market cap of $85 billion. In 2021, it generated $4.6 billion in revenue. This gives the stock a price-to-sales ratio (P/S) of 18.5, much higher than the average P/S of 3 for the S&P 500.
Now, Shopify is growing much faster and has higher margins (54% gross margins in 2021) than the average stock in the S&P 500. But the price you pay for a stock still matters. If there's anything that will prevent Shopify from putting up good returns for shareholders over the next decade, its the valuation.
