After shares of Shopify (SHOP 0.23%) tumbled more than 73% year to date, the company's management team decided to add to their positions. Insider buying typically shows conviction in the long-term trajectory of the business, especially when it is done on the open market, rather than through stock options. Considering that Shopify's CEO, Tobias Lütke, bought $10 million worth of Shopify stock in early May -- along with several other Shopify executives adding to their positions -- this management team seems to think highly of the stock today.
But what should long-term investors think about the company? Should investors follow in Lütke's footsteps and buy shares while they are down? The stock has fallen drastically because of macroeconomic uncertainties, but this could be a buying opportunity for investors who are willing to hold this company for the long haul.
Image source: Getty Images.
Enabling the next generation of e-commerce
Shopify makes it easier for businesses to start, run, and grow their commerce operations. The company offers nearly every tool a business may need to operate and expand their business, from point-of-sale systems to marketing to fulfillment.
WooCommerce, BigCommerce, and Amazon all rival Shopify, but the latter has sturdy competitive advantages. Amazon, for example, has been known for suppressing small businesses on its platform. When a business succeeds on Amazon, the company sometimes rolls out a similar product itself, promoting its own duplicate over the original business. Shopify, however, does not make any products on its own. It simply facilitates e-commerce transactions, aligning its incentives with customer success.
WooCommerce and BigCommerce have the same neutrality that Shopify has, but they don't have its scope. Shopify simply has one of the widest offerings for businesses, with a plethora of services available and multiple subscription tiers to suit businesses of any size. This large offering helps to explain why Shopify merchants represented over 10% of U.S. e-commerce sales in 2021.
Because of these advantages, Shopify brought in $1.2 billion in revenue in Q1 2022, jumping 22% year over year. Merchant solutions -- which primarily spring from payment processing fees and transaction services -- drove this increase, expanding 29% year over year and making up almost 72% of revenue.
The company's growth will likely come from adding more products over time to solidify itself as the leader in the industry. This will make its service more valuable to existing consumers, who will likely end up spending more and becoming more ingrained into the Shopify ecosystem.
It will also attract new merchants. The company's aiming to accelerate that process with the Shopify Fulfillment Network (SFN), which handles the logistics for Shopify merchants. This will make it easier for small businesses to offer affordable two-day shipping to keep up with larger competitors.
What could go wrong?
The company's expansion strategy is not a sure thing. Amid continued innovation and product rollouts, there is always the risk that customers just won't like its offerings, costing Shopify time and money. Ensuring that the SFN will thrive is critical, considering that the company bought Deliverr -- a fulfillment technology provider -- for $2.1 billion to spur its SFN capabilities. It will also likely spend millions of dollars over the coming years to build fulfillment hubs across the U.S.
Investors were also worried about Shopify's Q1 net loss of $1.5 billion, but this is not as bad as it looks. Shopify has strategic partnerships with multiple public companies, in which it has investment stakes. Due to the widespread tech stock sell-off, shares of these companies tumbled. Shopify had to report a loss, even though these are not actual losses -- just on-paper losses on investments that might eventually bounce back. Without these unrealized losses, the company would have generated positive net income.
Shopify's biggest concerns are recession fears or a slowing economic environment. Shopify merchants primarily sell discretionary goods; if consumers spend less on e-commerce because of inflation or recession worries, merchants could get hurt. With 72% of Shopify's revenue coming from merchants selling more items, Shopify would get damaged too.
Is Shopify a buy?
The company is trading at 10 times sales, its lowest valuation since 2016, and shares are priced at their lowest point since late 2019. With that, you're getting Shopify at the same price it had when it generated just $505 million in quarterly revenue, and ran $20.6 billion in gross merchandise volume through its platform (48% of the volume processed in Q1 2022). In other words, Shopify looks like a bargain at this price.
While the risk of a recession or a slowing economy could put a damper on Shopify's business prospects in the short term, the long-term future for the business still looks incredibly bright. With its edge over competitors and exciting growth prospects, I think that Shopify could survive this precarious economy and thrive over the long haul.
For that reason, investors should follow in Lütke's footsteps and grab shares of Shopify.
