Shopify's Stock Split Is Complete, but This Is the Real Reason to Buy the Stock

Shopify (SHOP 0.23%) completed its 10-for-1 stock split on June 29. Many investors were probably hoping the event would trigger a rebound, but the share price has continued to fall since the split. Of course, the real impact may materialize slowly. By lowering the share price, splits make stocks more affordable for retail investors. But low market sentiment and high inflation may be keeping many investors on the sidelines right now.

That being said, stock splits have no actual impact on important metrics like revenue or cash flow, nor do they change the intrinsic value of a company. So if you are looking for a reason to buy Shopify stock, a split shouldn't be it. Instead, here are three real reasons Shopify is a buy right now.

1. Shopify is showing leadership in a big market

Shopify simplifies commerce. Its portfolio of hardware, software, and financial services helps merchants manage a business across physical and digital channels. That includes popular marketplaces like Amazon and social media platforms like TikTok, but it also includes direct-to-consumer (DTC) websites.

That's a big deal. DTC business models give brands more control over the buyer experience, allowing them to build lasting customer relationships. To that end, D2C sellers are gaining traction with shoppers. In fact, 64% of consumers will buy directly from brands on a regular basis this year, up from 49% in 2019, according to eMarketer.

More broadly, Shopify's brand authority and broad portfolio have made it the leading e-commerce software vendor in terms of market presence and user satisfaction. In fact, its platform powered 10.3% of U.S. e-commerce sales in 2021, up from 5.9% in 2019. Only Amazon has more market share.

Many investors were disappointed with Shopify's first-quarter results. High inflation weighed on consumer spending, and the company faced tough comparisons. After posting year-over-year revenue growth of 110% in Q1 2021, revenue rose just 22% in Q1 2022. Additionally, rising operating expenses resulted in a generally accepted accounting principles (GAAP) loss on the bottom line, as Shopify continued to invest aggressively in growth.

However, the company still gained market share in both physical and digital commerce in the U.S., and it has still delivered impressive financial results over a longer time horizon.

Data source: YCharts. TTM = trailing 12 months. CAGR = compound annual growth rate.

Looking ahead, shareholders have good reason to believe Shopify's growth will reaccelerate in the coming years. The company puts its market opportunity with small and medium-sized businesses at $160 billion, and management is executing on a strong growth strategy.

2. Shopify has a robust growth strategy

Shopify is working to expand internationally. Since the onset of the pandemic, the company has introduced shipping and/or financing services to the U.K., Canada, and Australia, and it added payment processing in two more European geographies, bringing the total to 17 countries. Those efforts are paying off. Last year, 64.5% of revenue came from the U.S., down from 68.4% in 2019.

Shopify is also focused on product innovation. In the past few years, it introduced a more sophisticated retail point-of-sale system, designed specifically for omnichannel merchants (i.e., those that integrate online and offline sales). It also debuted the Shop mobile app, a buyer engagement tool that allows consumers to browse recommended products, make purchases, and track shipments.

Perhaps more exciting, Shopify made its accelerated checkout solution (Shop Pay) available to non-Shopify merchants on Meta Platforms' Facebook and Instagram, and Alphabet's Google. That move is not without precedent. MercadoLibre did the same thing with its payments platform, Mercado Pago, and the company has seen extraordinary traction with off-marketplace merchants. If Shopify achieves similar success, it could supercharge growth.

Shopify's most ambitious project is the Shopify Fulfillment Network (SFN). The company recently acquired delivery-as-a-service provider Deliverr for $2.1 billion. Shopify will pair its own warehouse automation technology with Deliverr's predictive software, network of warehouses, and last-mile partners to streamline logistics for merchants. Ultimately, the SFN will enable merchants to offer next-day and two-day delivery across the U.S.

In the short term, the investments required to bring the SFN online will be a headwind to margins. But in the long run, the SFN will further differentiate Shopify, helping D2C merchants compete more directly with Amazon and its expansive logistics network.

3. Shopify has a reasonable valuation

Shopify's stock price has plunged 80% from its high, as macroeconomic uncertainty has led investors to ditch risky growth stocks. As a result, the stock currently trades at 8.9 times sales. That looks reasonable, and it's an absolute bargain compared to the five-year average of 30.4 times sales. Given the momentum behind the business, this growth stock is a buy at its current price.