Tech Sell-Off: 1 Stock Split Growth Stock to Buy Now and Hold Forever

A number of popular tech companies plan to split their stocks this year, and that news has investors fired up. While splitting a stock changes nothing about the underlying business or its intrinsic value, it can drive share price appreciation in some cases by making the stock more affordable. And with the tech-heavy Nasdaq Composite 25% off its high, it's easy to see why investors are excited.

However, stock splits and other short-term tailwinds should not be the sole basis for investment decisions. Solid prospects for long-term growth are a much better reason to buy. Fortunately, Shopify (SHOP 1.26%) checks both boxes. The company has a 10-for-1 stock split planned for June 28, and it's a key player in the growing commerce industry. Better yet, with the stock price down 78% from its high, now is great time to buy.

Here's what you should know.

Image source: Getty Images.

Direct-to-consumer commerce

Shopify makes commerce easier. Its software helps businesses manage sales and inventory across physical and digital channels, including branded websites, mobile apps, and social media networks. The company also provides services like payment processing, discounted shipping, and financing, as well as tools for money management, marketing, and cross-border commerce.

Shopify is more than a solution for omnichannel commerce; it's a solution for direct-to-consumer (DTC) commerce. That distinguishes it from retailers like Amazon and Walmart. DTC business models give brands complete control over the buyer experience, enabling them to build lasting customer relationships. That value proposition has helped Shopify win more than 2 million merchants.

Even so, the company has captured just 3% of its $160 billion addressable market, and its market opportunity should only get bigger in the years ahead. Shopify is constantly innovating, online shopping is becoming more popular, and broad economic growth typically causes total retail spend to increase over time.

Strong market position

Shopify is the most popular e-commerce software platform, according to the latest G2 Grid report, and the company is steadily taking market share. It powered 10.3% of online retail sales in the U.S. in 2021, up from 5.9% in 2019. Not surprisingly, that has translated into solid financial results.

Over the last two years, Shopify's gross merchandise volume (GMV) has grown at 65% per year, but revenue has grown even more quickly, evidencing the company's pricing power.

Data source: YCharts. Chart by author. TTM = trailing-12-months. CAGR = compound annual growth rate.

Of course, Wall Street was disappointed with Shopify's first-quarter results. Revenue growth slowed to 22%, and the company generated negative free cash flow of $70 million. However, Shopify faced a tough year-on-year comparison and a difficult macroeconomic environment. In Q1 2021, revenue skyrocketed 110% due to the pandemic-driven acceleration in e-commerce. But since then, rampant inflation and the reopening of physical stores have altered consumer behavior.

Despite those headwinds, Shopify continued to gain market share in Q1 2022, as online and offline GMV continued to outpace spend in the broader U.S. commerce industry. Better yet, management is executing on a strong growth strategy -- centered around international expansion and the build-out of the Shopify Fulfillment Network (SFN) -- that should fuel continued market share gains in the coming years.

The SFN is particularly noteworthy. Shopify recently announced a $2.1 billion deal to acquire Deliverr, a company that already provides logistics and fulfillment services to merchants on Amazon and Walmart. Deliverr's network management software and its ecosystem of partner warehouses and last-mile carriers will be paired with Shopify's existing robotics and fulfillment infrastructure.

Ultimately, those resources will enable Shopify-powered businesses to offer next-day or two-day delivery across the U.S. That value proposition should help Shopify compete more directly with Amazon, a company that has already built an immense logistics network.

Compelling valuation

Shopify enjoys a leadership position in a massive industry, and management is making smart moves that should reinforce the company's competitive edge. Better yet, after falling sharply from its high, Shopify stock trades at 9.7 times sales, near its cheapest valuation as a public company.

If you're not convinced, consider this: Founder and CEO Tobias Lütke recently invested $10 million in the company. That's a compelling piece of information. There are many reasons to sell but only one reason to buy shares. Lütke clearly believes Shopify has significant upside potential.