Most investors don't know every single detail about a stock, but they typically have learned at least a few significant factors affecting the company. For instance, investors in Shopify (SHOP 0.23%) probably know that the Canadian e-commerce platform operator is benefiting from the long-running trend of growth in e-commerce spending, that it recently made a $2.1 billion acquisition of a logistics business, and that management has said the company would be investing all of its gross profits back into operations in 2022.
But it's the details behind the general knowledge that can often make all the difference in making the correct investment decision about a stock. Let's look at these three factors in more detail and see what they really mean for current and potential Shopify investors.
1. Tailwinds from the growth of online shopping
Shopify has been benefitting from some powerful tailwinds from consumers shifting their shopping online. In 2020, 14% of global retail sales were conducted online. That figure is estimated to grow to 22% by 2025 and is up from less than 2% in 2002. Shopify empowers enterprises to establish and grow their online presence. Unsurprisingly it has benefited from the trend of increasing online sales.
From 2012 to 2021, Shopify's revenue has snowballed from $24 million to $4.6 billion. Of course, this growth might slow in the near term as economic reopening related to the pandemic adjusts consumer behavior yet again. However, the growth curve should continue upward over the next five to 10 years. Shopping online offers consumers far too many advantages over brick-and-mortar stores at frequently similar or lower prices. For those reasons, the longer-run trend is unlikely to reverse even though shoppers may want to visit stores more often in the near term as an excuse to get out of the house.
2. Shopify acquires Deliverr for $2.1 billion
In its efforts to offer more services to its merchant clients, Shopify has been expanding its fulfillment capabilities. Through scale efficiencies, Shopify can help merchants deal with logistics more effectively. To help solidify that offering, Shopify made a $2.1 billion acquisition of the logistics firm Deliverr back in May. When completed, the deal will strengthen Shopify's fulfillment network with Deliverr's software, talent, data, and scale.
Today's online shoppers expect fast and free delivery (thanks in no small part to efforts from competitor Amazon), a feat not as easily serviceable by smaller businesses. Signing up to Shopify's fulfillment network helps small businesses level the playing field as they go up against Amazon and it gives customers expected delivery dates, faster delivery times, and opportunities across several sales channels.
3. Investing all gross profits in 2022
Lastly, Shopify management informed investors it would be sinking all of its gross profits back into the business in 2022. To put that into context, Shopify earned $2.5 billion in gross profits in 2021; such is the magnitude of its reinvestment. That means, of course, that it is not likely to be profitable on the bottom line. The announcement will reverse the trend over the last three years where Shopify's rapidly expanding revenue helped it grow operating income from negative $141 million in 2019 to $269 million in 2021.
SHOP Gross Profit (Annual) data by YCharts.
However, management's eagerness to invest is understandable. If global online sales are expected to grow from 14% in 2020 to 22% in 2025, that's a significant opportunity to capture revenue and market share. Investors might want to give management the benefit of the doubt here, given that Shopify management has successfully grown the business to this point. They should also keep an eye on things as it is admittedly a bit troublesome that Shopify is making such significant investments when consumer behavior, at least in the short term, is focused more on in-person shopping.
What this means for Shopify investors
The details behind these factors about Shopify should assuage some concerns that the business is not likely to grow in the aftermath of the pandemic. The rate of growth may temporarily slow, but overall, Shopify has a long runway to keep expanding. But the details also mean that risks are elevated in the near term and likely t result in continued stock price volatility. These types of investments can take years to bear fruit, with uncertainty on how successful they might be a risk to building into any investment decision.
