Shopify (SHOP -0.24%) has emerged as one of the more intriguing e-commerce stocks. Its affordable and easy-to-use platform and a huge investment outside of the software space have boosted the popularity of both the company and the stock.
Admittedly, it has experienced a massive drop amid the tech sell-off. Nonetheless, due to three key advantages, investors have a rare opportunity to profit from a potential recovery in this tech stock.
1. Shopify has a widening competitive advantage
Small companies looking to set up e-commerce sites have long turned to Shopify. The ease of setting up a site, the low cost, and its customer service helped to set it apart. Grand View Research forecasts a compound annual growth rate of almost 15% through 2027 for global e-commerce. This would take the size of the world's e-commerce industry to an estimated $27 trillion.
Nonetheless, many different companies offer such platforms and are determined to capture significant market share in this industry. Shopify is the most popular platform, claiming 23% of the market, according to Cloudways. But with WooCommerce, Wix, Squarespace, and others competing for this market, Shopify did not appear to hold a significant advantage.
However, it has transcended this struggle by moving outside of the software space and launching the Shopify Fulfillment Network (SFN). With SFN, Shopify can process, package, and ship a company's orders. Also, building this warehouse and shipping infrastructure comes at a high cost, meaning few of its competitors will likely follow suit. Hence, any e-commerce business likely to need this help will probably choose Shopify over its peers.
2. The opportunity in Shopify stock
As a result of its success, Shopify stock briefly peaked above $1,700 per share. Since then, a sell-off in tech growth stocks and a temporary slowing in e-commerce hammered the stock. It suffered further as management forecast that 2022 revenue growth would slow by an unspecified amount. This caused the stock to lose more than 70% of its value in a three-month period.
Even though it has bounced off its lows, investors can still buy it at a 60% discount from the November high. Admittedly, its price-to-sales (P/S) ratio has fallen to 19. Although it is significantly more expensive than Wix or Squarespace at that sales valuation, its P/S ratio is still near a three-year low.
Also, its revenue of $4.6 billion grew 58% in 2021 compared with 2020. While the company forecasts a slowing of revenue, it also predicts revenue growth will rise over the course of the year, reaching its highest level in the fourth quarter. This should bode well for Shopify's revenue growth over time.
3. Shopify's potential for a split
Furthermore, although Shopify has dropped far from the November highs, investors cannot rule out the company doing the next stock split. The upcoming splits for Alphabet, Amazon, and Tesla have brought attention to stock splits. Also, at approximately $700 per share, Shopify is currently among the 25 most expensive stocks by nominal price in the U.S.
Despite a split changing little on the surface, a lower nominal stock price would make whole shares affordable to small investors, thus sending the price higher.
Should investors consider Shopify?
Admittedly, Shopify will continue to face challenges as more shoppers buy offline and investors grow leery of high valuations. Nonetheless, SFN gives the company a considerable advantage over software-oriented competitors. Additionally, the discounted share price and the rising possibility of a split could help bring more investors into the stock. As Shopify continues to expand its role in e-commerce, investors could see outsized returns over time.