Shopify (SHOP 0.45%) is without doubt one of the most widely followed tech stocks among investors. The company is the industry-leading provider of tools to help merchants create and maintain an online retail presence, attracting more than 1.7 million customers in the process. Shopify continues to expand its offerings, most recently adding fulfillment and cross-border services to its already robust laundry list of capabilities.
This week, the company announced a 10-for-1 stock split, the first time in the company's history that it has divided its share price. Investors who were considering buying the stock face a conundrum: Should they buy shares now? Or wait until after the stock split (expected at the market close on June 28)?
There are actually compelling reasons on both sides of the argument. Let's look at two reasons investors should buy the stock right now and one reason to wait until after the split.
Reason No. 1 to buy now: a compelling stock price
Late last year, Shopify stock was flying high on the back of rapid e-commerce adoption resulting from the pandemic. However, the one-two punch of fears of a slowdown in online retail and the recent stock market correction have conspired to send Shopify's stock tumbling. Recent results suggest the selling is probably overdone.
Shopify's revenue grew 57% in 2021, while adjusted net income climbed 66%. While investors would normally embrace that level of performance, the results seem tame compared with what the company achieved in 2020, when revenue soared 86% and adjusted net income surged 298%.
Yet, it was Shopify's forecast that seemed to spook investors when it cited the "more measured macro environment" and said that its "outlook anticipates revenue growth for full year 2022 that is lower than the 57% growth achieved in 2021." Given the existing uncertainty, higher inflation, and ongoing geopolitical events, Shopify's management is likely being conservative in its assessment.
An apparent overreaction by investors, coupled with the recent Nasdaq bear market, has sent Shopify stock down by roughly 63% and lowered its price-to-sales ratio to 17, a level not seen since early 2019. During the same period, Shopify's revenue has surged more than 346%, suggesting the recent sell-off is overdone. While the stock has never been cheap using traditional valuation metrics, its robust growth frequently catches investors off-guard, which it will likely do again.
Reason No. 2 to buy now: a large and growing opportunity
Shopify began as a simple set of tools to help merchants of all sizes harness the power of the internet to sell their goods and services online. Since then, however, it has expanded from website building and payment integration to warehousing, cross-docking operations, fulfillment, working capital loans, and even solutions that address the complexity that comes with international sales.
The growth opportunity for Shopify has just begun. Worldwide e-commerce sales are expected to grow by 12% in 2022 to more than $5.5 trillion and make up 20% of total retail sales.
Shopify's software-as-a-service (SaaS) platform is the top choice for merchants selling goods and services online, and the company has historically outpaced the growth of the broader online retail market. For example, its revenue growth of 57% last year easily outpaced the 16% growth of the overall e-commerce market. As long as the company continues to take a greater share of the overall opportunity, investors will reap the rewards.
So how big is that opportunity? Shopify's management estimates the total addressable market for small and medium-size businesses at roughly $160 billion. To give that context, Shopify generated revenue of $4.6 billion last year, which helps illustrate the magnitude of the opportunity that remains.
1 reason to buy after: easier on the wallet
For some investors, forking over $600 for just one share of Shopify stock might exceed what they have available for investing at a given moment. It's possible to get Shopify shares at a lower cost, however. Investors on a limited budget have the option of buying fractional shares. A growing number of brokerages allow investors to make investments in almost any dollar amount, allowing them to buy portions of one share. This gives investors the ability to buy from a greater number of investments without being hampered by a high share price. It also aids in diversification.
Unfortunately, not all brokers offer fractional shares at this point. For investors unable to buy shares because it exceeds their investing budget and who don't have access to fractional share buying, waiting until after the stock split might make the purchase a bit more palatable. Shopify stock is currently trading for around $600 per share, but after the 10-for-1 stock split, shares will be priced at roughly $60, allowing cash-constrained investors a greater degree of flexibility.
Buy now or wait?
The answer to this age-old question depends on the individual circumstances of the investor. However, given Shopify's track record of growth, the beaten-down stock price offers savvy investors the opportunity to get shares at a discount. In my mind, it doesn't matter whether you buy Shopify shares before or after the stock split -- just so long as you buy them.